Dec 29 FT Articles What could go wrong, EU/China, Alibaba, Vietnam the new China?


29 Dec

MARKETs @ 1:30ptm HK time
JAPAN 
Nikkei opened higher and has continued to track higher though the session. Index heavyweights seeing good interest with Fast Retailing +3.9% and Softbank +4%, Sony +2%, Daikin +1.8%, Currently +620pts (+2.3%) @ 27,474
Topix traded in a similar fashion currently +28pts (+1.6%) @ 1,816S KOREA  
Market is ex Dividend today.
Kospi opened slightly positive but dipped initially before rebounding to 2,820 but then trended lower through morning hitting the day low; 2,795 around 12:45pm and the rebounded to test Monday’s closing level but failing to break out. Currently -6pts (-0.2%) @ 2,804
Kosdaq opened higher and rallied to 945 before working gradually better currently +25pts (+2.7%) @ 951
TAIWAN 
Opened higher and tested to 14,547 but failed to break higher and reversed. Sold down to 14,435 level and then traded sideways with resistance at Monday’s closing level. Currently -26pts (-0.2%) @ 14,458 CHINA 
CSI 300 opened slightly positive but sold down to 5,034 in early trades. Rebounded to 5,070 but failed to hold and sold down into lunch. PM opened higher and working better Currently -6pts (-0.1%) @ 5,058
HONG KONG 
Opened @ 26,491 +173pts vs +41pts ADRs and effective trading in the range 26,500/600. Currently +271pts (+1%) @ 25,585
EUROPE 
No data due but likely to follow the positive lead from Asia.
US Futures 
Opened flat but have risen in Asian time Dow +84pts , S&P +0.3% and NDX +0.2%.Data due Redbook, Case-Shiller Home Prices


Hong Kong fugitives tried a Shenzhen court yesterday heard the cases of 10 of the 12 Hong Kong citizens accused of fleeing Hong Kong by sea.  The court said the judgement would be a later date.  The families of the accused were not allowed in the court neither were reporters or foreign diplomats which has raised concerns.It also mentioned that Zhang Zhan, a Chinese citizen journalist who accused Wuhan authorities of a cover-up of the coronavirus pandemic, was sentenced to four years for for “picking quarrels and provoking trouble”.  A charge regularly used to silence critics and activists.  
It is interesting to note that Chinese ‘Global Times’ ran an article interviewing Zhang Jixian the Wuhan doctor who first officially reported virus; the tells state media that the country ‘certainly did not conceal the relevant data’ from the rest of the world.
It also comes as an international WHO team is preparing to head to China to investigate origins of outbreak. Although I suspect the scope of that investigation will be tightly controlled by Beijing and not include many interviews and especially not with people critical of the governments handling of the incident.
Read also Citizen journalist jailed over cover-up claim

Boost for EU business as Brussels nears investment deal with China. Reports that a deal could be close and says negotiators have made progress including on the core issue of worker’s rights. That for many has been seen as a key sticking point so it will be interesting to see what China has been prepared to concede on that issue; if the agreement is signed and made public. So a formal deal could be announced later this week.  It also notes that none of the EU countries had raised a stop sign.  
The EU seems to have decided to progress with the deal rather than working with the new US administration saying that is seeks to get a similar benefits to that which the US reached with the US under the Phase 1 Trade Deal.
Areas to be covered are 'manufacturing, financial services, property, environmental services, construction and shipping and air transport services.’'For China, the deal is set to lock in existing market-access rights while offering some investment possibilities in the renewable energies sector.’
Even is a deal is agreed this week it is unlikely to start before the second half of the year as it will need to be ratified by the EU Council and Parliament.I still think that Europe should be delaying the final agreement and seeking to work with the new US administration to try and get a more comprehensive package for everyone.

Alibaba shares slide 8% after China turns up heat on Ant. Despite announcing an increase in its share buyback plan the shares continued to slide, along with other Chinese E-commerce names. Although they are trading higher today.  Investors are cautious to see what reforms Beijing may impose on the sector.  
It has also raised concerns about what are actions Beijing may take against the wealth individuals in China that are in anyway critical of the administration.
The key for investors is that these are still very important growth stocks and important to China’s ability to be leading players in the tech that goes with them. It will not want to harm that. Equally it does not want to weaker the sectors in anyway that might allow foreign competitors to come in and win significant market share. Which is good news.
The problem is that with increased government control the enterprise and innovation which has made these companies so successful may be stifled. Tencent’s model is probably less likely to be impacted but I think that some of the action taken will be about giving the government access to the customer data that these E-commerce firms have built up on their customers. It will be interesting to see if customers are happy with that.
In general, the Chinese citizens seem to be happy, or at lease accepting of the amount of data the government holds on them. Whether that will extend to their shopping habits remains to be seen. Especially those whose spending might seem to be at add’s with their declared income.

What can go wrong? Investors’ views on the big risks to markets in 2021Notes that the market consensus is currently cautiously optimistic; the recent new mutation of the virus cause a wobble but the overall sentient remained intact; we have a vaccine and the future looks better.
It takes comments from Howard Marks, Valentijn van Nieuwenhuijzen (CIO NNIP), Sam Finkelstein (GS), Vincent Mortier (Amundi), Andrew Law (Caxton), Liz Ann Sonders (Charles Schwab), Scott Minerd (Guggenheim Partners),Gregory Peters (PGIM Fixed Income), Danny Yong (Dymon Asia), Paul McNamara (GAM)
Here is my synopsis
A number focus on the possibility of rising interest rates (due to inflation) which would cause asset values to fall. The benign view of inflation is a worry to some. Also if inflation reappears and the Fed moves to counter it whether we see market ’tantrums’ and whether the Fed has the resolve to stand up to them.
Fixed income; two risks low yields and lack of central bank options if there is a negative growth shock.
Belief that vaccines will solve all the problems; which they won’t. The potential for central bank or government policy mistakes. The risk in the hunt for yield to accept lower quality. The fact that portfolios have been constructed by the conditions seen over the past 10 years of low inflation and so there is a lack of knowledge/skill to re-order portfolios should inflation reappear.
The fact that so many in the markets are so optimistic and hence more vulnerable to a negative event.
The fact that historic norms of competition, risk management and fiscal prudence have been replaced by monetary intervention. Cheap money has lead to a poor credit environment which raises the risk of credit default.
Whilst the 'Blue Sweep’ didn’t happen the ‘Blue Sneak’ could if the Democrats win the Georgia run offs; which could result in a market re-think.
US dollar weakness accelerating which would reduce the Fed’s flexibility with negative interest rates; that could prompt an equity sell off.
Emerging market policy makers have tighter constraints than developed ones and their debt servicing costs have not been suppressed to the same extent as developed markets.

Vietnam’s industrial supply bases start to tilt away from China. Vietnam has been a beneficiary of the US/China trade war and its good track record on standards and wide range of free trade agreements helped.  But Covid then revealed that it was still heavily reliant on Chinese supply chains.  So companies are looking to change that.  It quotes Michael Kokalari of VinaCapital who says the number of companies looking to move to Vietnam is increasing and will continue to do so.
But there are issues with Vietnam as a manufacturing base. About markets are not as cheap, good Industrial space is in demand especially in the south around Ho Chi Minh City (home to Vietnam’s clothing and furniture makers). Its main airport is already operating at over capacity. It is being expanded and there is second airport being built but nit due for completion until 2025. That is important because most of the components it uses to assemble high value products are sourced from China, S Korea, Taiwan or elsewhere are flown in. At present it doesn’t have a local supply base although a number of foreign firms are looking at setting up bases.
Also the general infrastructure needs improvement so that logistics can operate efficiently.
There is also concerns that it may face its own trade tensions with the US; with Robert Lighthizer probing whether it has been manipulating its currency. Whether that changes with the change of administration remains to be seen.
It reports that the Vietnamese market is adapting to all of this and starting to build its own supply chains too.
It certainly looks well positioned and has the advantage too a a good number of the population speaking English which also helps. It is also further ahead that its neighbour Cambodia although all the countries in the region are pushing to benefit.
But the lack of infrastructure is a key concern and in many cases the growing Chinese influence can been seen in some cases with resentment at the Chinese buying the land that is key for development which has raised some local resentment.

Delivery Hero told to offload rival S Korea app in $4bn Woowa deal.  The concerns were that it could limit competition ‘"..as it would have a far-reaching impact on various stakeholders of multi-faceted markets linked to delivery app platforms, such as restaurants, consumers and delivery workers,” the regulator said.’
Delivery Hero will accept the divestment and its shares rose on the news. It also notes that in a in Asia is faces competition from 'Indonesia’s Gojek, Singapore-based and SoftBank-backed Grab, and Uber Eats.’ Previously it said that it hoped to allay antitrust concerns saying that they thought 'Korea’s ecommerce market would benefit from more competition for popular online platforms such as SoftBank-backed Coupang, Kakao and Naver.’
It notes that if the deal now proceeds it will be one of S Korea’s largest internet deals; paying $3.48bn for 87% of Woowa which is owned by institutional investors including Hillhouse Capital, Altos Ventures, Goldman Sachs, Sequoia Capital and Singapore wealth fund GIC. The other 13% is held by Woowa’s senior management and would be converted into Delivery Hero stock.
It reveals that S Korea like so many countries is struggling to work out how to deal with rising tech groups locally as well as the international players. Without the divestment Delivery Hero it is estimated it would have controlled 90% of the food delivery market.

Mitsubishi Heavy bolsters green tech push. Looks at MHI's plans to invest in green technologies beyond solar and wind and reinvent itself. It will look at  hydrogen, ammonia, carbon capture and nuclear power to achieve the goal of zero emissions. In the past it was centred around fossil fuels; that now needs to change but will take a massive amount of investment.  The article notes 'The Japanese conglomerate faces a challenge reinventing itself because of its reliance on businesses from coal power stations, shipbuilding and automotive turbochargers to regional jets, space rockets and the defence industry.’
The company realises that it needs real technological innovation and that the process will take time. It also notes that China is a leader in the solar and battery sector and so it will look at alternatives. Hydrogen is something that Japan is exploring its clean but is currently expensive and not yet viable at scale. Meantime MHI is exploring burning ammonia alongside coal and gas in existing plants. It has also won a power plant contract in Utah to burn hydrogen and natural gas before a gradual conversion to 100% hydrogen by 2045. This sector offers a future for MHI’s boilers, steam and gas turbines businesses. Another area it believes it has an advantage in is carbon capture and storage which is likely to become a growing sector over time too.Investors will be watching carefully at the different technologies to see which really do have the potential to replace coal.

Hong Kong faces public scepticism over mainland Chinese jabs. Vaccination set to become the next battle ground between the public and administration.  The key being that now the public are being given the choice of which vaccine they want how many will want the Chinese ones over the alternatives?  It will be interesting to see if all the administrations key people opt for the Chinese vaccines as a demonstration?
Carrie Lam is already slightly on the back foot having earlier said that the public would not be given the choice. She said she was misunderstood. It is worrying that she is so often ‘misunderstood’ you would think that she would be much more careful?
Concern about the Chinese vaccines is largely because there have been so many scandals linked with mainland medicines and products; like Baby milk for example a particularly serious case in recent history. But also early in the pandemic many masks and test equipment being sent back to China because it fell short of the standard required. Add to that the lack of public data on the Chinese vaccines and the trials they have undergone.

Singapore eases virus curbs to boost economy. It raised the number of people that can be invited to a household to 8 from 5. It has increased capacity for Mall and places of worship. The move is seen as helping the situation slightly but the economy will only really be helped when the borders are re-opened.  It is due to start vaccinating health workers tomorrow and has a good record of controlling the virus with low single digit numbers and for 15 days last month reported no cases.  Part of it success has been the harsh quarantines on migrant workers who live in crowded dormitories.  Earlier in the pandemic that was the source of a major outbreak.

S Korea president’s popularity hits record low. Seems to be largely linked to the resurgence of the covid virus in S Korea and is in stark contrast to the popularity he enjoyed back in April when he won a landslide victory.  It notes concerns about the virus and the high property prices along with reform of the chaebols.  
But covid is a major issue with complaints that the governments initial successes lead to it being complacent about ordering vaccines. The government did earlier play down the rush of vaccines saying that it wanted to see the longer term effects and believed it had time. But that was before the resurgence of cases which is now straining the country’s medical services and has lead to at least one death of a citizen dying whilst waiting for a hospital bed. The country also discovered that it had discovered the UK discovered mutation in a returnee.

Protest granny ‘prepared to die’ for freedom. Wong, known for waving union jack at rallies, returns after arrest in mainland China.  Looks at Alexandra Wong, known as ‘Grandma Wong’ and her protests against the tightening by Beijing of control of Hong Kong.  A Shenzhen citizen who has been arrested and given a ‘re-education’ trip to Shaanxi.   An interesting read about the passion that Beijing’s actions have triggered.

Xinjiang campaigner says China pressure led him to flee Kazakhstan. Serikzhan Bilash has been documenting Beijing’s crackdown on ethnic minorities.  He believes the leadership of Kazakhstan has forged so many links with Beijing and received billions of dollars of investment from China that it is now firmly under China’s sway.

Donald Trump’s pardons must not obstruct justice. Abuses of constitutional clemency power should be investigated and prosecuted. By Laurence Tribe a Harvard professor of constitutional law.
An interesting read about the pardons that Trump has so far granted and others that he may in the final days of his administration. He sets out that there are two types of corrupt pardons. ‘There are those that are merely contemptible for their intrinsic immorality — they may give a free walk to American war criminals (the Blackwater contractors convicted of a massacre), corrupt politicians (former Illinois governor Rod Blagojevich, convicted of trying to sell a Senate seat), and relatives (Mr Trump’s son-in-law’s criminally convicted father Charles Kushner). There are others that pose structural dangers by placing the president and his circle above the law and thwarting investigations into wrongdoing.’
He notes that even the former should be forcefully condemned and future presidents should set higher standards for themselves or even better avoid electing rotten presidents.
But the second group are more dangerous because they concern crimes that are linked to Trump’s close associates and maybe even to the president himself.
In such cases there is the option of impeachment, although there is a lack of time for that now. But there is also 'post-presidency criminal prosecution’. He sets out 'Pardons used as a means of obstructing justice are integral parts of criminal conduct precisely because the president has the formal power to grant them. The very breadth of that power enables a president to deploy it as a tool of criminality. If pardons used to reward silence could be invalidated by the courts, they would be worthless to their recipients and useless in a scheme to interfere with a formal inquiry.
The result is not to negate the pardons issued but to expose a president to prosecution for the way he deployed them. If Mr Trump abuses pardons to shield himself and key allies from justice, that could be charged as criminal obstruction of justice, an abuse of the constitutional power of clemency to accomplish an illegal end.’
He also notes that if the courts so acted and then call some of those who had received pardons to testify against the former president it would make it much harder although not impossible for them to invoke their right to silence to avoid self incrimination. The writer stresses that if Trump is found to have used his pardon power to commit crimes that he must be prosecuted to avoid setting a precedent. Equally he see no way that Trump can pardon himself, to do so would violate a centuries old tenant that no-one can be trusted to judge his own case.
He concludes 'Perhaps the only way to limit this potential misuse of the pardon power would be to prosecute an ex-president who tries to use it on himself. If Mr Trump seeks to pardon himself, the next attorney-general must zealously investigate him and prosecute any federal crimes that are uncovered. Forgiveness may be divine, but it cannot vindicate misbehaviour. Democracy and the rule of law demand that we hold everyone to account.’
I think he makes some very good points and the worry must be that Trump will push past the limits of accepted norm just as he has done in his presidency.

For interest
Private equity becomes its own buyer’s market. The impact of the pandemic recession has helped propel a previously niche set of transactions into the mainstream.  When the fund is coming to an end of it’s pre-set life and there isn’t a good market into which to sell the assets, some funds are setting up news funds which they run to buy the assets.  Nothing illegal but price discovery is key.  

Small search engines bet on skill and regulation in battle with Google. Neeva and You.com set out plans to whittle down the US group’s 92% market share.  Hoping that the current anti trust cases against Google will result in new opportunities.Looks at You.com, Neeva, Mojeek and possibly Apple.  Neeva is interesting because it looks to charge a subscription and combines results from a user’s emails and other personal online information with what it hopes will be higher-quality web results in specific niches, such as product search.It notes that most of googles competitors licence their web index from Microsoft’s Bing,  but Mojeek is aiming to be totally independent by building its own index.  So far its indexed 3.6bn pages vs Googles hundreds of billion.

FT BIG READ. MANAGEMENT. Business in the time of Covid
At the end of the most difficult year in many of their careers, chief executives are planning for the uncertainty around the pandemic to continue well into 2021 even as the global economy starts to recover. A good overview of how managements learnt to deal with the pandemic and how that will mold their outlook for 2021.

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