Jan 22 FT More on Ma, China's start up's, RMB outlook, Joined up China Policy and more

22 Jan

MARKETs @ 1:45 HK time
Apple names mixed despite MS saying they expect a record Dec print.
NIKKEI 225 Opened lower as pre market inflation data missed forecasts but worked higher but pulled back again when the PMI data came out lower than expected. It again worked higher, hitting resistance at 28,700 and then easing lower into lunch at 28,650. PM opened lower but again working higher. Currently -80pts (-0.3%) @ 28,679
TOPIX followed a similar pattern Currently -2pts (-0.1%) @ 1,858
Inflation Rate Dec -1.2% YoY vs -0.9% Nov (F/cast was -1%)
Inflation Rate Dec -0.3% MoM vs -0.4% Nov (F/cast was +0.1%)
Inflation Rate Ex Food & Energy Dec -0.4% YoY vs -0.3% Nov (F/cast was -0.3%)
Core Inflation Dec -1% YoY vs -0.9% Nov (F/cast was -1.1%)
PMI Flash
Manufacturing Jan 49.7 vs 50 Dec (F/cast was 50.9)
Services Jan 45.7 vs 47.2 Dec revised (F/cast was 49.5)
Composite Jan 46.7 vs 48.5 Dec (F/cast was50.2 )
Kospi opened slightly higher but sold down initially to 3,150 which it tested several time before rallying to 3,185; again testing several time before selling down to flat and trading around yesterday’s closing level. Currently -1pt @ 3,160
Kosdaq followed a similar pattern currently unch @ 980
Opened lower but worked higher hitting resistance around 16,126 and then traded sideways/lower before selling down around 11am to 15,970 level but then stages a rebound currently -135pts (-0.8%) @ 16,019
Apple supply chain names mixed despite MS saying yesterday they expect record Apple numbers; Hon Hai rising but TSMC falling.
CSI 300 opened flat initial ticked higher but then sold down to 5,513 before a small bounce into lunch. PM opened higher and worked up to 5,556 which its tested a couple of times but failed to break above and Currently -7pts (-0.1%) @ 5,559
Pre market Opened @ 29,809 -119pts vs -23pts ADRs CNOOC weak as MSCI announced that it will delete the firm from the MSCI ACWI and MSCI China All Shares indexes -VE for HKEX.
Broad weakness with Petrochems, Property, Auto, Macau all weak.
EUROPE Expect markets to open lower following the weakness in Asia
EUROZONE PMI Flash (Manufacturing,Services and Composite)
GERMANY PMI Flash (Manufacturing,Services and Composite)
FRANCE PMI Flash (Manufacturing,Services and Composite)
UK Consumer Confidence, Retail Sales, Public Sector Net Borrowing PMI Flash (Manufacturing,Services and Composite)
US Futures 
Opened flat in Asian time; but have slipped slightly DOW -34pts S&P slightly -VE and NDX -0.1%
PMI Flash (Manufacturing,Services and Composite), Existing Home Sales EIA Natural Gas and Oil report, Baker Hughes Rig count data.
Senate expected to confirm former Fed Chair Janet Yellen as Biden’s Treasury secretary.

FT Front Page US joins international effort to ensure global access to vaccine
• Health tops Biden agenda • WHO welcomes re-engagement • $1.9tn relief bill ‘ready’
Volkswagen slapped with hefty EU fines after missing emissions targets Having been in prime position to meet the targets it was beset by software problems.  It says the fines are already booked in the previous quarters and will not impact future profits.  But it does highlight the difficulties in switching from combustion to electric.

Ma’s return brings fleeting cheer for Alibaba as Beijing pursues its attack
Shares surrender gains after central bank unveils anti-monopoly rules that threaten affiliate Ant
Notes that Mr Ma’s wealth has dropped 10% since he criticised the Chinese regulators, although doubt that will worry him. Also that being on television probably means that he not facing legal action at present. But the draft new rules which would impact his flagship companies means the outlook for his companies has changed. Key being the potential break up of Alipay. Previously it had looked as if the central bank might be content if Ant “returned to its roots” as a payments provider, while placing its fast-growing lending businesses into a new holding vehicle that would face more stringent oversight. That no longer seems to be the case.
The new rules would also impact Tencent’s WeChat Pay, as under the PBoC’s new rules, it can advise the State Administration of Market Regulation to break up any “non-bank payment company” that controls more than half of the market; or any two with a combined market share of more than 67 per cent.
It says that it is unusually for the PBoC to state what makes a monopoly, so that is something else to be considered. But it probably reflects the threat seen from the data held by the two over spending habits and credit status; data the PBoC has been keen to get control of for sometime.
The article also notes that Mr Ma’s appearance was far more humble than that seen last year; 'The clip focused on his charitable foundation’s support of rural education, dovetailing perfectly with President Xi Jinping’s long-running campaign to eradicate poverty in the world’s most populous country.’
The article reproduces some of Mr Ma’s speech and the criticism of the established thinking and systems. Whilst those systems will benefit from a scaling back of Alipay and WeChat Pay it does highlight that the PBoC must be careful because they are part of the norm for so many people in China; and people don’t usually like change.

China start-ups feel chill as investors warm to big names. Key being that due to the pandemic fewer potential founders are prepared to leave secure well paid positions to start up new ventures.  At the same time investors are much more aware of the risks to start up’s in the current environment.
Areas that are in focus and favour are semiconductor, online education and healthcare start-ups. Semiconductors especially as its a focus for Beijing to try and become self-sufficient but that leads to its own problems. 13,000 companies entered the sector between Jan and Sept last year. There have been a number of articles in the FT on this; the problem is that many of them have no experience and the likelihood is that a lot will fail and money will be wasted.
Key for investors then is focusing on the best in class. But it also notes that “Big tech companies used to be making later-stage investments into our portfolio companies. Now they are starting to come in earlier,” said Charles Zhang of Lightspeed, a venture capital firm. “Also, there is comparatively less M&A in China, so minority investments give them the access they want to up-and-coming start-ups.”
Key investors tend to be the likes of Tencent and others with existing platforms and scope to build out new lines.

Renminbi steps into Biden era contingencies on front foot
Investors divided over extent of cooling in China-US trade tension and health of dollar.
Key points seem to be the state of US/China relations, the strength of the dollar in the light of Biden’s stimulus and other plans, the inclusion of the China Govt bonds into the FTSE Russell’s World Government Bond index in October 2021. There is also the PBoC’s actions in reigning in existing debt in the Chinese banking systems and its interest rate policy along with the demand for Chinese goods; which has been strong but likely to change as vaccinations are rolled out and the demand for medical and electronic goods wanes. Also Chinese purchases of US goods under the trade agreement phase 1 and phase 2 if the policy is extended.
For investors the profile will change through the year as it reflects all the above inputs all of which are likely to change as the year progresses. Currently the strength of the RMB is as much a factor of USD weakness as RMB strength. One thing that is not mentioned is the potential re-emergence of inflation which is something that I think could happen and whilst the Fed has committed to keeping rates low if inflation expectations rally quickly it may be forced to review that policy. But worth a read.

Opinion  The right answer to Xi is a joined-up China policy.  A fresh approach, one with consistency that covers the areas economic, security, diplomatic and military fields.  China’s actions in the South China Sea cannot be viewed separately from its aim to dominate in 5G or the Belt and Road.
The appointment of Kurt Campbell seems to indicate that Biden has grasped this point and whilst it will not be easy as there will still be tensions between departments linking the aims together and confronting China in a uniform way should give better results; especially if it also unites allies. Although it notes the EU move to get an agreement with China does undermine it a little (although yesterday MEP voted to condemn the move saying the EU has lost credibility on human rights by agreeing investment pact and called for targeted sanctions. The agreement still has a long way to go to be ratified too).
But in an interesting article this month for Foreign Affairs, Mr Campbell set out America’s strategic goal as to re-establish a durable balance of power in east Asia. China has declined the role of responsible stakeholder in the rules-based system, so Washington will need “strong coalitions of both allies and partners” to shift the balance of incentives in Beijing.
He concludes by saying 'The interests of Tokyo and Seoul should speak for themselves. And Europeans can no longer afford the luxury of viewing China’s ambitions as an American problem. The great power rivalry between the US and China has become inextricably bound up in the race for technological supremacy. Europe has to make a choice. Beijing’s strategy towards the west is to divide and rule. The west’s answer should be a one-China policy.’
I certainly hope that one can be achieved it will give everyone more clarity including China as to what is acceptable and in the case of Taiwan would reduce the risk of a miscalculated war.

LEX Vaccine storage: cold call. Looks at the need for special cold boxes to transport the covid vaccines which is positive for Panasonic and Haier Smart Home.  Notes they 'have more than doubled from a March low. Much of those gains are thanks to core electronics businesses. Neither yet reflect the growth potential of the steady new line of vaccine storage business in 2021.  Worth a look

Navalny arrest tests strength of Putin opponents
Looks at the struggle in Russia between Putin and opponents. Whilst the State remains clearly in control, the ability to stir up supporters even whilst in prison is a concern. I would imagine that China is watching the events carefully too. In Putin’s case the discovery of a palace that was allegedly built for him by a ‘coterie of oligarchs’ with video evidence is embarrassing. In China the party has been careful to clamp down on any excesses by party members. But that has not stopped the gap between the poor and rich in China is widening and is a big concern for the party. The fact that luxury brands are recording record sales in China is a testimony to that. But closing the gap and improving the standard of living in China is a huge task. Old SOE’s in their sunset years are no longer delivering the jobs and the lack of support for the SME’s is a problem. The recent surge in covid cases could also damage the much heralded recovery. Which could be under more pressure as the West roles out mass vaccinations which means the demand for medical equipment; particularly protective clothing etc will drop off as might the demand for computers and tech equipment. It will then be a question of whether demand for China’s more traditional exports picks up.

Fund founder says investors are ‘frogs being boiled’. Looks at the letter sent by Seth Klarman, the founder of hedge fund Baupost Group.  In essence saying that Central Bank policies have convinced investors that risk is no longer a concern.  That undermines the price discovery action of the market.  It also makes it difficult to judge the health of the economy.  
A couple of nice quotes “With so much stimulus being deployed, trying to figure out if the economy is in recession is like trying to assess if you had a fever after you just took a large dose of aspirin,” he wrote. “But as with frogs in water that is slowly being heated to a boil, investors are being conditioned not to recognise the danger.”
Mr Klarman uses Tesla as an example saying the shares in the barely profitable car maker have soared because low interest rates make projected cash flows more valuable.
I must agree with much of what is said I think having interest rates set by central banks at levels they hope will stimulate the economy and inflation rather than on the basis of giving an investor a reasonable return on his money for the risk does mean that the whole market pricing system is undermined. If cash is mispriced then so is risk. Especially when, as has been seen for a number of years that low interest rates do not stimulate companies to borrow money. They will only borrow money when they need to; in normal times that is when they can see rising demand for their goods or services and hence look to increase capex to meet the new demand. The other time they borrow money, as seen last year is when there is a crisis. That is now leading to its own issues now; having raised money what now to do with it; on which there were a number of good FT articles yesterday. Key being; no point in putting it in the bank as zero rates. Returning it often has costs associated, invest it in the company, buyback share or make acquisitions. The fact that there is no clear answer as to which is best does rather validate Mr Klarman’s point.

Moment of reckoning for techs after months of home comforts  Looks at the prospects as vaccinations are rolled out and people begin to move from lockdown digital to interaction again. It asks which of the tech companies have real staying power.  Next week we get earnings from Apple, Facebook and Microsoft; all of which are likely to be good.
The real question it asks is how much business has changed forever.
Will those that increased spending on digital advertising continue in that mode as people return to a more normal way of life. 2021 is likely to be a far more complicated year than 2020 was.
Notes that 2020 was a Zuna 'when you’re finished with the Zoom calls, you can order dinner on Uber Eats, then settle into some Netflix watching and do some Amazon shopping.’
2021 could be a Lame 'booking a Lyft ride, organising a weekend away on Airbnb, finding a non-virtual date on Match, or booking vacations on Expedia.’
The bull case for Tech would be Netflix where because of the pandemic the company was able to become self-sustaining than might otherwise have been possible. Similar for cloud operators who have benefited from remote working. Many will not now go back to the old ways of working; they will try and pick those systems that have helped enhance their business and improve their resilience to future shocks. Subscription models mean current levels are likely to be maintained the question is where will the new phase of growth come from; since 'the valuations of companies such as Apple and Alphabet are at more than 30 times this year’s expected earnings — the top of their recent ranges.'
In summary the article notes
'The price/earnings ratio on semiconductors — historically one of the most cyclical parts of the tech industry — has doubled in the space of two years. It may be that tech has entered a new age of elevated growth. But when the pandemic finally starts to recede, there is still plenty to prove.’
For investors it explains the recent rotation into some of the value and SME companies that markets have been seeing. But finding companies that are going be able do well is not easy. I suspect it will be the SME’s that are able to quickly scale back up again, key will be supportive balance sheets with little debt. I also think inflation related names are going to do well.

Editorial  Port congestion raises the spectre of inflation. It is still unclear how much Covid-19 has reduced economic capacity.  Container shortages leading to rising shipping costs is an example of ‘cost push inflation’ for advanced economies. The long term damage to trade is not yet quantifiable as economies transition back to more normal circumstances. If that takes place quickly demand could outpace supply.  Stagflation; high unemployment and rising prices would be the nightmare for Central Banks.
Notes shipping cost are volatile; but this is less about building ships than containers being in the wrong location; so should be easier and quicker to resolve. But it notes that the costs are not just shipping but other items as well; semiconductors for cars (due to shortages), LNG prices (due to cold weather), other commodities (due to mine closures) and agriculture prices.
Over reacting to a transitory surge would be wrong but consumer prices spiked in 2008 briefly but didn’t impact labour prices. But the ECB’s interest rate hikes to forestall it were seen as a hubristic mistake.
So Central banks should be vigilant and aware that previous experiences may not be repeated as resilience may have now been built in, but that is likely to have increased costs. There are likely to be other short term constraints too, not least for the UK Brexit. It notes ECB kept rates unchanged whilst facing deflation and a strong Euro. USD weakness amplifies inflationary pressures, albeit that the Fed is happy to allow the economy to run hot. But 'implied predictions of inflation in options prices, an admittedly imperfect measure of expectations, have diverged on either side of the Atlantic. For the moment, however, this should merit nothing more than a particularly sharp reminder that the Fed has not abandoned price stability as a goal altogether.’
It sets out the range of potential inflation factors and if those build and become the expectation then it is likely to feed into wage expectations and that could have a big impact; time will tell but investors should at least be aware of the potential.

For Interest Biden faces crises that are feeding on each other. By Mohamed El-Erian
Sets out that the issues facing Biden are very different to those he faced in 2009; something I think that Biden will be well aware of.
Mr El-Erian set out that the big issue is 'of relinking bubbly markets to economic realities.’
His solution is the 'four-prong approach: provide immediate financial relief to vulnerable segments of the population, improve our fight against Covid-19, counter household financial insecurity, and boost productivity and growth potential, including through a lasting green recovery.’
He accepts that Biden’s two part stimulus package addresses that along with speeding up vaccinations.He raises the issue of the Fed’s reaction to the 20 basis point rise in yields on longer dated bonds; so far the Fed has re-iterarted dovishness. But 'if the yield rise were to continue, it would increase borrowing costs and risk shaking the two main tenets that have bolstered vibrant stock markets: that there is no alternative to buying riskier assets and stocks are cheap based on discounted cash flow models. But the Fed’s constant reassurance only reinforces investor confidence that there are only upsides to investing in markets increasingly disconnected from economic reality.’
He concludes by saying 'Early signs suggest policy design is unlikely to be the main obstacle to the Biden administration’s success. But smart economic policy is a necessary but not sufficient condition for improving both the financial and medical well being of the US and the global economy.The new team also needs a high degree of political agility and a much greater sense of national collective responsibility, both political and social.'

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