Feb 2 FT China demand for mutual funds creating a bubble? India leads in jabs race, S Korea short ban extension?

02 Feb

MARKETs @ 2pm HK time
Nikkei 225 opened higher but tested yesterday’s closing level in early trades (concerns about extension of the state of emergency) before working higher into lunch. Some resistance seem at 28,300 level but broke above going into lunch.PM opened flat and trading sideways with support at 28,300 Currently +221pts (+0.8%) @ 28,310
Topix followed a similar pattern currently +14pts (+0.8%) @ 1,844
Nintendo seeing some weakness after good results and increasing outlook yesterday.
Pre Market inflation data was higher than expected
Kosdaq opened slightly higher but tested down to 955 before bouncing and working higher 972 level about mid morning. Then reversed and traded back down to 954 before bouncing Currently +5pts (+0.5%) @ 962 Kospi followed a similar pattern but didn’t enter into negative territory; currently +44pts (+1.4%) @ 3,100.
Tech names in focus along with Naver & Kakao. Won was weaker
Inflation Rate Jan +0.6% YoY vs +0.5% Dec (F/cast was +0.2%)
Inflation Rate Jan +0.8% MoM vs +0.2% Dec (F/cast was +0.2%)
Opened higher and work up to 15,800 by mid morning and then traded sideways. Dipped slightly at the end to close +350pts (+2.3%) @ 15,760 CHINA 
CSI 300 opened higher but tested Monday’s close in early trades before working higher to 5,480 but unable to break above, small consolidation to 5,460 before working back to 5,480 again. PM opened flat and broke up to 5,492 but easing back. Currently +63pts (+1.2%) @ 5,482
Goldmans expect its growth likely to moderate in next few months; I think likely considering the recent covid wave, Chinese New Year and the fact there is likely to be a lag as covid PPE demand easing and China’s more normal exports seeing a pick up.
Pre Market Opened @ 29,378 +485pts vs +36pts ADR’s
Worked higher in chippy trading to 29,511 by mid morning but then trend slightly lower into lunch. PM trend lower currently +429 pts (+1.5%) @ 29,322Broad based buying interest with all sectors in the green, E Commerce leading. Pharma names seeing good interest along with Consumer and Alternative energy.
Expect markets to open higher again. Covid and earnings still in focus.
EUROZONE GDP Growth Rate Q4 (F/cast is -2.2% QoQ (-6% YoY))
FRANCE Inflation Rate Jan (F/cast is +0.2% YoY (-0.3% MoM))
UK Nationwide Housing Prices Jan (F/cast is +7% YoY (+0.3% MoM))
US Futures 
Opened flat in Asian time Dow +18pts, S&P and NDX flat but worked better currently Dow +163 with S&P and NDX +VE. Earnings in focus. GameStop weak in after hours. NXP was weak too but I think could see a bounce after guided higher.
Redbook, ISM New York Index, IBD/TIPP Economic Optimism, API Crude Oil Stock Change
Earnings: Alphabet, Amazon, Exxon Mobil, Pfizer, UPS, BP, Amgen, Electronic Arts, FireEye, Chipotle, Viavi Solutions, PerkinElmer, ConocoPhillips, Sirius XM, Harley-Davidson, Alibaba, McKesson, Eaton, Marathon Petroleum

FT Front Page
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China’s fledgling funds stoke fears of bubble. Retail traders flock to new products that lack established performances and portfolios.Looks at the rising demand for mutual funds in China and the worry that demand for new funds could lead to a new stock market bubble.  The expectation is that China will develop the largest asset management business outside the US this decade; with huge potential for investment managers.  
UBS forecasts mainland mutual fund assets to hit $16tn by 2030 (US Mutual Funds are currently $23tn). China is distinct from the US and Europe because many investors are prepared to commit their money before a three year track record and a pit of $100m is established. In fact often Asset Managers struggle to find enough product for investors.
When I was at Haitong that was very true and we were constantly looking to try and acquire asset management companies with good products. Interesting note that new mutual funds launched in China last year attracted net inflows of $389bn, +90% YoY. Balanced funds are in demand along with actively managed equity funds. It estimates about 80% of total net inflows where to new launches. But it notes the churn, holding onto cash can be difficult because Chinese investors themselves tend to be pretty active too and the use of mobile apps allows investors to watch and switch. With an estimated 20%-30% of new cash redeemed within 6 months. Just look at the funds that were set up for the Ant IPO to get an idea; and the fall out when the IPO was pulled.
It mentions E Funds Management who 'shattered the fundraising record for a China manager after receiving orders worth $36bn in a single day for its newest product: the E Fund Competitive Advantage Enterprise Balanced fund. It was capped at $2.3bn.’
It was not alone. But many funds are seeking to reduce the ticket size and imposing tighter restrictions in order to avoid retail fickleness. But at the same time new regulations are prompting changes too.
Quotes 'Kelvin Chu, an analyst at UBS in Shanghai, said tighter rules covering wealth management products sold by banks and wealth managers had encouraged more retail investors to invest their savings in mutual funds.’
Also 'CrossBorder Capital, a London-based consultancy, estimates that China alone supplied almost one-third of the $22.7tn surge registered in global liquidity in 2020 as central banks turned on the monetary taps to prevent the pandemic destabilising financial markets “High liquidity ratios are associated with future increases in equity prices,” said Michael Howell, founder of Cross-Border. It is recommending China A shares as a “buy” to clients.’
Against that back drop a senior advisor to the PNoC warned of the risk of asset bubbles if the PBoC didn’t tighten. The PBoC has a tightrope to walk between seeing the economy growing and asset bubbles. Worth noting the recent increased restrictions on property lending in China. Last year President Xi called for a controlled rise in the market but the rally has been more rapid and is causing concerns.

Without doubt there is great potential for the growth of these funds but the lack of product within China is a concern and the fact that China restricts off-shore investment seems to suggest that at some point something has to give. Either the local markets rally hard or China allows off-shore investing. That for global asset managers would be dream come true!
Japan nuclear power will be essential, insists minister.  If Japan is to reach its net zero carbon emission target by 2050; illustrated by the power outages during the recent cold snap.  
Renewables remain the top priority but Japan has geographical limitations; limiting the use of solar and wind, although they are starting to look at wave power; hence the need for nuclear. Meaning the sector will see a new revamp, 10 years after the Fukushima nuclear disaster shaped the last one. Japan has restarted just 9 of its 60 nuclear power stations as public hostility remains high; although the electricity companies have been pushing for re-starts. It will be interesting to see if popular opinion can be persuaded to allow nuclear again.

India pushes to eclipse rival China in global jabs race. New Delhi utilises its capacity to demonstrate scientific might and bolster bilateral ties.  
Key being that India has for years 'been the inconspicuous supplier of vaccines for most of the developing world’s babies.’
So its ability is known along with its reliability and safety. Its Serum Institute has been supplying 70% of the worlds vaccines and now it is looking to out do China is vaccine diplomacy.
The Serum Institute is limited by its agreement with AstraZeneca, which has the rights to distribute to developed countries; and so despite direct approaches cannot always facilitate supplies but elsewhere it can. India also has a number of other companies producing vaccines and so is well placed to rival China in the vaccine rollout stakes. Mentioned are Biological E partnering with Johnson & Johnson and Bharat Biotech and Zydus Cadila producing their own candidates.
Here I think the key is past track record. China has had number of drug production scandals with poor quality control. More recently the unwillingness of its drug companies to provide details regarding vaccine trials is a concern. Without more transparency China is likely to come second to India.
For India it is an excellent opportunity to build bridges something that it is keen to do. One possible issue could be sourcing the raw materials; many of the base drugs that the Indian pharmaceutical sector uses come from China and so one would imagine that the likes of the Serum Institute are sourcing alternatives in case those supply are hampered by the standoff between the two nations.
For investors I think it underlines the need for diversification some of China’s drug companies are good investments but long term investors should look for the transparency of management along with their track record.

South Korean politicians back ban on short selling to win retail investor votes. The ban is likely to be extended for another 3 months past its current March deadline.   Says what started as a market stabilisation issue has now become political; with over 200,000 people signing a petition to make the ban permanent.
It’s a but strange because of the number of Korean retail investors who are happy to join with US traders in attacking US short sellers.
Domestic fund mangers are said to be wary of short selling but that probably has more to do with the power of the Chaebols and their ability to use their and their associates investment abilities to squeeze short sellers.
The problem for some international investors is the inability to hedge positions resulting in some exiting the market completely.
There is no easy answer, short selling I don’t think undermines markets; it just provides another investment option. Powerful Chaebols and cross structure holding can be equally undermining to markets. Short selling involves risk and sometimes, but not always, reward. It has been useful in exposing bad companies and practices and I think a part to play.

Read also John Plender GameStop is just the latest sorry case of misallocated capital who feels it raises questions about market efficiency, regulation and financial stability.  
The influence of price in-sensitive investors (Central bank asset buying programmes). Notes that prior top that there were index funds which again blunted price signals and amplified shocks. Add to that the very price sensitive but unconcerned about economics momentum traders to which we can now add day traders. Hence the market structure is prone to misallocation. Add to that the Central Banks interest rates policy which removes about pricing indicator. All of which he thinks bodes ill for the post pandemic recovery.
He refers to a World Bank report that notes 'that labour productivity growth in advanced economies had halved since the 1980s in a declining trend that was accelerated by the great financial crisis. Investment weakness explains the lion’s share of this slowdown over the past decade.’ The pandemic he says is amplifying that trend through unemployment and lack of schooling hence global supply chain disruption will constrain the reallocation of labour to higher productivity sectors. The World Bank hoped 'offsetting productivity-enhancing opportunities if Covid-19 triggers lasting changes in the way businesses operate.’ So as to eliminate in-efficient firms. The problem is that the misallocation of money to such firms as demonstrated in GameStop will undermine that process.
'Creative destruction, the mainspring of capitalist dynamism, has been anaesthetised.’ So whilst the attack on hedge funds may seem gratifying to many it undermines their role in the system. 'But such funds can be an antidote to the structural changes that have contributed to the divorce between market valuations and fundamentals.’
A good read, but I think so much of it stems from the original financial crisis, the application of QE and the fact that it has never been unwound. It starts with money being mis priced; originally by the Fed to prevent firms from failing. It’s success with that goal continues today because the programme has never been halted or reversed.

President woos Republicans on recovery plan. Biden hopes moderates will help Democrats pass a large stimulus package.  He has invited moderate Republican senators to the White House to discuss their $600bn proposal and to seek out common ground with his $1.9tn one.  He risks backlash from his own party but the key is that he is trying; even while Pelosi said they are willing to use a special procedure known as budget reconciliation, which is reserved for certain tax and spending measures, to pass the stimulus bill, enabling them to circumvent Republican support.  Biden is hoping that comments from Yellen and Powell will aid his case but the reality is that is might just come down to political points with even moderate Republicans unwillingness to hand Biden an early legislative victory.  In which case it will be the American people and possibly the global economy that suffers.

Biden struggles to improve rate of vaccinations. Core of plan involves better co-ordination between federal and state governments.Underling that vaccines in and of themselves are not the solution.  Biden is trying to improve the system but it will take time.  
Personally I think he’s taking a good approach. Improving communication and logistics between Federal and State; at least that means that those on the ground can have a better plan for actually administering the vaccines.
It is interesting that the article notes that pharmacy chains such as CVS and Walgreens, who are contracted to lead the distribution effort to nursing homes have been criticised regarding the slow pace of vaccinations and it quotes a Health officer who says the companies’ performance has been a fiasco.
For investors it underlines that the process will take time. Drug company valuations have become stretched but I don’t think the vaccinations for covid will be a one and done. The fact that the virus mutates suggests that going forward more people are going to need annual jabs; which is good repeat business for the companies. I also think that since we are over a year into the pandemic and yet no wiser on how it was created that there is the potential as ever for another virus which again will be good for the drug companies.

For Interest 
Tesla fan Ark outguns titans of Wall St with bold tech bets
• Managed ETFs attract $8bn inflows
• BlackRock and State Street outpaced
Looks at Ark which actively manages its ETF’s and has some extremely good performance.Its funds are focused on innovation, genomics, fintech, autonomous tech and the next-generation internet. So all quite high risk but the fact that it is actively managing them is key. Also the article notes that its actively engaging with its investors; ‘...helped by regular videos from Ms Wood discussing market and economic trends, as well as webinars.’ 'Alongside taking “aggressively concentrated bets”, the firm is “very good at taking complex stories about companies and explaining them to investors”, he added.’
Some worry that Ark could suffer the same fate of some thematic funds that did well in the dotcom era but then failed to perform. As per the high benchmark makes future out performance harder.
For Investors the use of actively managed ETF’s makes sense as a means of outperforming but they also the carry the risk of failing. The key is understanding the risks being taken and that seems to be what Ark is really do well at.

Hong Kong court clears ex-JPMorgan banker of bribery.  The case was connected with the hiring of Chinese ‘princelings’ to win business and brought by the ICAC.  The case revealed around JP Morgan’s “sons and daughters” programme where it sought to hire the children of some of China’s elite business people and government officials.  In the hope of securing lucrative future deals.  But was in potential breech of the US Foreign Corrupt Practices Act; JP Morgan agreed to settled an investigation in the US by paying $264m.
The judge basically found that it could not be certain the banker’s intention was to win an edge for an IPO mandate, she noted that JP Morgan’s legal and compliance team had made a lot of mistakes and concluded that the banker was not the one who could make the final decision on the hire. Other banks have operated similar practices in the past and will no doubt be studying the ruling.

It’s a fine line but banking is like so many other businesses, it's about relationships. Where money is involved there will always be bias. The fact that the business has a bad track record historically is a testimony to the fact that some deals can be very lucrative. Today many people working for funds or businesses cannot even accept a free lunch during a presentation for an IPO. That seems ridiculous but the problem is so many people are unable to be moderate. It's not just banking but every business; doctors drug conferences, Aviation jollies, etc.
In China it can be worse; the Pharmaceutical companies working not just with doctors but local hospitals too.
Unfortunately it is impossible to stamp out whilst people are still greedy but legislation to date has been too blunt to really address the issues.

Robinhood’s calling collides with Wall Street reality. An urgent dash for cash and a rebuke from users highlight strains for online broker.  Key is that whilst its ambition may have been to “democratise finance” it is part of the establishment.  
What I find interesting is the amount the National Securities Clearing Corporation, an equities clearing house, had originally requested; a margin deposits of about $3bn at 3am. It then reduced it to $700m that is a big swing when you are talking about money at risk.
Also how that interacts with Robinhood’s model of selling it’s flow.One thing that is clear is that by placing restrictions on trading it upset a lot of its clients and with a large number of competitors out there that is not good ahead of its IPO.

FT BIG READ. ENERGY Shale digs deep for profitability
Last year’s crash devastated the American oil and gas industry. Producers are consolidating but higher crude prices will test their willingness to restrain activity and their ability to lure back investors.

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