Jan 25 FT US warns China, Allies agenda on China, Samsung, Panasonic, Sony, Europe Banks


25 Jan

MARKETs at 2pm HK time 
Asian markets stronger than I was expecting. No data pre market
JAPAN 
Opened higher but initially sold down to 28,600 level which it tested a couple of times before rebounding to 28,770, before easing slightly and trading sideways Currently +93pts (+0.3%) @ 28,722
Topix followed a similar trading pattern but after the rebound drifted lower through the day. Currently flat at 1,857
S KOREA  
Kospi opened slightly higher and has worked higher through the day currently +70pts (+2.2%) @ 3,209
Kosdaq followed a similar pattern currently +18pts (+1.9%) @ 998
TAIWAN 
Opened flat and initially sold down to 15,770 level before working better to close -73pts (-0.5%) @ 15,947 Caution ahead of data due after market Industrial Production, Retail Sales, M2 Money Supply
CHINA 
CSI 300 opened slightly lower and tested 5,550 initially but after 10am rallied and worked higher into lunch (5,627). PM saw the market open higher and test 5,650 but saw resistance and eased back to the lunchtime level. Currently +73pts (+1.3%) @ 5,642. Signs that team China at work.
HONG KONG 
HSI Pre market opened @ 29,677 +230pts vs +105pts ADR’s and worked higher to test 30,000 mid morning and whilst failing to break above initially retested and broke above to 30,107 at lunch. PM did test slightly higher in early trades but then sold down to 30,000 and trading sideways. Turnover high suggests a lot of mainland money support the market. Currently +512pts (+1.7%) @ 29,957
E Commerce names strong even Xiaomi higher despite S&P Dow Jones is said to remove the shares like XIAOMI-W and fixed-income securities. Telcos and Property seeing some weakness.
EUROPE 
Futures pointing to a higher open FTSE 23 points higher at 6,707, Germany’s DAX up 59 points at 13,916, France’s CAC 40 up 17 points at 5,567 and Italy’s FTSE MIB up 83 points at 22,126, according to IG.
German Ifo data due. Investors hopeful on US stimulus and earnings.
US Futures 
Opened Dow +56pts, S&P +0.2% and NDX +0.3% in Asian time but have worked higher and are now Dow +74pts S&P +0.3% and NDX +6%
Data due Chicago Fed National Activity Index, Dallas Manufacturing Index
Earnings: Kimberly-Clark, Yamana Gold, Steel Dynamics

Front Page 
WHO warns on vaccine delays. Especially with regard to poorer countries, warning that if poorer nations are not vaccinated the potential for the virus to take hold and mutate such that the current vaccines are no longer effective.  Another reminder that the vaccines of themselves are not the answer the key is mass vaccinations.
Poland presses EU to turn up heat on Moscow after Navalny arrest
• More sanctions ‘absolutely justified’ • Duda points to Gazprom • Bloc split over Kremlin
Deutsche launches internal inquiry into mis-selling of investment bank products  Which would have been in breach of EU rules and also whether those involved then colluded to share the profits. -VE

Inside 
US warns Beijing over incursion into Taiwan’s air defence zone. US State department said “We urge Beijing to cease its military, diplomatic and economic pressure against Taiwan and instead engage in meaningful dialogue with Taiwan's democratically elected representatives,”.
'Ned Price, state department spokesperson, said the US was concerned about China’s “pattern” of intimidating Taiwan — and other neighbours — and reminded Beijing that the US relationship with Taipei was “rock solid”.’
It would appear that the US under Biden has every intention of maintaining the tough stance on China’s activities regarding Taiwan. The US has also decried the sanctioning of 28 Americans including Mike Pompeo.
Editorial Biden and US allies need a joint approach to China. Handling Beijing effectively requires clear priorities, and unity.  Recommends that they should have a clear eyed assessment of what is happening in Hong Kong, Xinjiang, Indian border, Taiwan, Australia, South China Sea etc. and the threat to western influence and democratic values.  Also the fact that the PLA aims strategically to be able to win global wars by 2049 and notes that Civilian technology companies are officially required to hand over any knowhow that the PLA demands; regardless of companies saying they don’t.  
I would note that it is still worrying that today we are still talking about winning global wars in a military sense; shows how little we have really learnt from history.
BUT China is a big trading nation and influential/crucial in a lot of global aspects like climate change. So isolating China is not an option. Constructive engagement has proved naive. So a new approach is required. Trump was right to be hard nosed but wrong to leave the allies out.
The West needs priorities and unity , China is good at finding and leveraging inconsistency cites the example of 'criticising the country’s human rights record without any plan to follow up with concrete penalties’ and 'China has also found it far too easy to undermine western attempts at a united front, typically by offering commercial lures to weakest-link countries.’
So the West needs a mechanism able to 'enable multilateral responses to Chinese misdemeanours but penalise their own members if they violate the unified front.’
'Trying to change China’s domestic nature by nudging it towards a more liberal path has failed. The focus should be on combating Beijing’s efforts to project its vision and power abroad through its influence campaigns and increasingly assertive military posture. ….. The west must find a way to trade profitably with China and co-operate in meeting common threats such as climate change, while restraining the spread of Beijing’s authoritarian creed. The future of the free world depends on it.’
A crucial objective and for investors getting it right should provide huge business potential for China and the West. The reality is that they are co-dependant.

Samsung is set to emerge stronger from scandal. Looks the implications of Lee Jaeyong, de facto head of the Samsung group being back in prison.  It leaves the company exposed to more risks.  There is also the likely demise of the cross holding structure that has allowed the family to remain in control for so long, as the tax bill may require sales of some operations.  He has also said he will not pass control to his children.  All of that said these changes taking place, whilst being forced on the company could result in a better company.
Notes in summary:'Under strict theories of portfolio management, said Mr Jun, South Korea's dependence on Samsung might look like an unwise concentration of resources — until it pays off stunningly and insulates the economy from a crisis that has battered other countries.
It is easy to forget how close Samsung, and other chaebol, such as LG Electronics, came to collapse during the 1997 Asian financial crisis. In fact, they emerged markedly stronger. That was not Ragnarok; nor is this.’
A good read; changes to Chaebols have long been required and are only slowly taking place but hopefully they will.

Democrats push for quick deal on stimulus. Republican senators urged to give backing to Biden’s $1.9tn package. Looking to try and get a quick deal, trying to gauge whether the Republicans are in the mood for serious negotiations.  Comes s Trump’s impeachment trial is scheduled for 8 February.  Giving him time to organise his defence and Biden to get more appointees in place and to try and get this packaged passed. For investors it underlines that for Biden too get his policies through will still not be easy.
Read also Senate majority leader charged with steering Biden’s agenda. Veteran Democrat Schumer faces a tough task to run ‘toxic’ US upper chamber.  A further reminder of how tough it could be.
Also read Opinion Biden and the ‘great rebalancing’. There are three big reasons why the US may be at a key inflection point in the labour-capital divide.
1) The speeding up mass vaccinations which should create more demand for jobs.
2) The move towards unionisation especially in areas like tech combined with more regulation will have an impact on wages.
3) Global demographic trends that have disadvantaged workers are finally reversing — and, for labour in the US, this may prove the biggest tailwind of all. As Charles Goodhart and Manoj Pradhan explore in their book The Great Demographic Reversal.
Summary 'Of course, rising labour costs would hit corporate profits. But, in rich countries — where consumer spending is the majority of the economy — business also stands to benefit. There is much to be gained, then, from a rebalancing of power between labour and capital.'

What impact will Joe Biden’s stimulus plans have on Fed policy?  Looks at this weeks FOMC meeting and whether Powell will give any indications about the US central bank’s commitment to keeping its ultra-accommodative monetary policy in place should inflation also return at a faster pace than previously expected.  Investors have largely assumed that Biden’s additional stimulus will happen but the question is what happens if that creates higher inflation than expected.  Powell has already tried to ease fears of the 2013 ’taper tantrum’ re-occuring.
Quotes Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management who said “Any disorderly rise of interest rates could create unstable conditions for the markets, which the Fed tries to avoid, especially at a time when parts of the economy are still very depressed,”.

Panasonic enters $22bn vaccine storage race. More on how the company is moving into the development of ultra cold boxes to transport the new covid vaccines.  Short term this is unlikely to be a game changer but longer term it could be useful and build on its 'history in refrigeration and freezing technology as well as a minority stake in PHC Holdings, its former healthcare unit and a big participant in vaccine storage that is now controlled by private equity group KKR.’
This new line in which it has adapted Panasonic’s technology for conserving energy in refrigerators to develop a portable box that can be used to transport vaccines and other material at a temperature of minus 70C. Shares have risen 8.4% since the product was launched last Thursday. Competitors include Thermo Fisher Scientific of the US and Chinese appliance maker Haier.
Good news for investors.

FT BIG READ. ENTERTAINMENT. How to slay the streaming demons
Once considered niche and esoteric, Japanese anime is now a multibillion-dollar industry with fans around the world. Sony wants to use its popularity to take on the likes of Netflix and Amazon Prime.Key points are Japanese animation now looks to go global whether it success or not is key for Sony. Because of the potential worth of media franchises. 'The list of the world’s 25 most valuable media franchises are topped by two Japanese giants — Pokémon and Hello Kitty with respective all-time sales of $92bn and $80bn — and include nine other Japanese names. But behind that success, say analysts, has been a tendency to under-exploit the anime gold mine and a failure to address the many structural problems and heavily criticised labour practices that are hidden behind the most popular titles.’
There is a structural shift as it looks likely that more than 50% of the anime revenues will soon be from outside Japan; comes as Netflix, Amazon Prime and other streaming services are globalising the content.
Key for Sony is bringing its Music, pictures and games into a position were they will function well together something they haven’t done in the past.
Looking ahead the has Sony managed that integration of content and hardware and whether the rest of the sector has a better model?
A good read, Sony’s share price has been steadily rising since the March sell off, it peaked early January and has seen some consolidation and it now stands on the cusp. I personally think the anime will take off globally is then a matter of whether Sony has the right model.

Indonesia’s Mr Fixit shows how to get a job done. De facto premier has become one of south-east Asia’s leading political dealmakers.  Looks at the background and career of Luhut Binsar Pandjaitan.  A key player for PM WIdodo and because Luhut is a Christian not seen as a political threat.  He had links with the Trump’s the question is whether he has or can establish those with the Biden administration. An interesting read.

Asset management primed for further year of consolidation. Activists push for more deals while banks seek new revenue streams outside of lending.  Looks like 2021 will see a continuation of 2020 in terms of M&A in the sector.  Interestingly it talks about banks wanting to diversify and find additional income streams. But asset managers saying '“is not about scale and cost cutting, it’s about providing a broad conversation with clients”’.  
That said the rising cost of regulation, technology and data for many firms is a consideration. But it says 'sceptics highlight that asset management transactions are hard to execute because integrating different cultures and structures has traditionally been challenging.’
Also it notes '“It’s more nuanced than just rushing to buy assets and build a mega player. It depends on whether they want to grow in the US, Europe or Asia or in a specific category,” said Janis Vitols, head of global asset management investment banking at Bank of America. “Scale is important but it will be targeted.”’
I think that will be very true especially with the growth of wealth management in Asia and especially from within China.

Managers of leading hedge funds make record gains
• Top 20 generate $63bn for investors
• Industry’s best returns in a decadeLooks at last years winners and losers and illustrates as with all areas of investing past performance is no guarantee of future success with some major name have a poor year.

Up, up and away Rally in US equities drives ‘ludicrous index’ towards dotcom-era levels. Looks at how the recent rally in US equities has resulted in 79 companies doubling in share price in the past three months (since 2011 the highest number prior was 13) and its at levels last seen in the Dotcom era.  The recent additions include FarFetch, Nio and Tesla.  An interesting read.

Executives braced for more corporate prosecutions. Number of criminal cases against businesses fell steeply during Trump administration Notes how a number of companies settled cases in final days of the Trump administration; quotes Brandon Garrett of Duke University  “A company that settles in the waning days of an administration must think there’s some benefit to not waiting,” .  
‘Mr Biden has chosen federal appeals court judge Merrick Garland as his nominee to lead the justice department as attorney-general. Prof Coffee said Mr Garland, a former federal prosecutor, would be likely to make some attempt to implement the Yates memo — a policy document that prioritises prosecuting corporate officers rather than companies — and decrease the use of deferred prosecution agreements. These include deals such as the ones Boeing, Deutsche Bank and JPMorgan Chase signed that help companies avoid a criminal record.’
It looks at how and why Deferred and non-prosecution agreements were brought in but now seem to be being abused noting how Boeing was able to pay a fine and avoid a criminal record despite admitting to misleading the regulators and in so doing causing the death of 346 people.
An interesting read because these deals were brought in to avoid the collateral damage of job losses following the Enron and Arthur Andersen cases. Today the employment situation is equally grave but the new administration looks to be taking a tougher line on corporate crime.

Europe’s bank bosses face further upheaval.  Just a year after the sector underwent a shake-up of its leaders, questions are being asked about their replacements. Comes as Bank earning kick off this week.  Looks at
UBS’s Ralph Hamers as UBS reports Tuesday.  Questions because a Dutch court reopened an investigation into his personal role in a money laundering scandal whilst he was at ING.  Which even if he is exonerated could be a distraction from the success at UBS but the process itself could require him to step down the article suggests.
UniCredit’s Jean Pierre Mustier due to report 11 February but may have already retired  after falling out with the board over strategy with regard to the acquisition of beleaguered state-owned lender Monte dei Paschi di Siena; a deal heavily opposed by shareholders and Mr Mustier. He says he’ll leave as soon as the board announces a replacement but there are no obvious replacements.  Options include Andrea Orcel, the former head of UBS’s investment bank whose lawsuit against Santander is due to start in March.
HSBC’s Mark Tucker and Noel Quinn  They have to explain the fall in the Banks share price and show they have a strategy to better perform in the fast growing Asian market.  Made more difficult be the tension between China and the west.  It is expected the Mr Quinn will reveal a second strategy in as many years; a concern in itself but does reflect the changing times.  Could include exiting the US and  shrinking in Europe.
Credit Suisse’s Thomas Gottstein The bank is due to report February 18, and he has had a tough first year after replacing Tidjane Thiam who was forced out after revelations about corporate spying. He hopes that 2021 will be a clean slate but has already announced a $1.1bn for legal costs related to US residential mortgage-backed securities, in addition to a $450m impairment charge on the value of its holding in hedge fund York Capital Management, which is closing down its European business.  There are also changes taking place to the board with his ally chairman Urs Rohner,  being replaced by outgoing Lloyds Bank chief executive António Horta-Osório in April.
Société Générale’s Frédéric Oudéa, One of the longer serving CEO’s who last year saw heavy losses due to the losses in revenues at its equity trading division.  Which resulted in criticism of its heavy reliance on derivitive products and he committed to making changes.  Soc Gen’s performance over the past 12 months has been poor: share price -44%, Price to book value 0.25 (less than half its peers) and so investors will be watching for signs that the changes promised are having an impact.  It notes that Mr Oudéa’s contract is due to run until 2023,  but the sudden availability of his former Ecole Polytechnique classmate Mr Mustier has reignited speculation over whether Mr Oudéa will see it through to the end.  
For investors, tough times for the banks and news today of another possible scandal at Deutsche will not help. For Soc Gen I think the problem is that for so many years the derivatives business had been so much more profitable than equities but the barriers to entry for competitors small and consequently; it's policy of not focusing enough on the straight equity relationships has come back to hurt it. Hopefully going forward it will take a more rounded approach, but from what I see in Asia the straight equity business is still the 'poor cousin’ of derivatives. Institutional dealer see little of the internal derivative flows and the firm has seen little focus on straight and block institutional sales trading; hopefully that will change.
For the Swiss banks it is the distractions of the past, hopefully investors will be more interested in the future potential than past mistake. For HSBC the bank that always has so much potential for leverage Asia and especially its relationships in China but has never really managed to get it right; the jury is out but certainly its advantages are being compromised.

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