Dec 3 FT Thoughts Equities, India, HK Dissents, London, Xiaomi, Softbank and lunch updates


04 Dec

MARKETs @ 1:30pm HK time 

JAPAN 

Nikkei opened lower but rallied into the green ahead of the PMI data but then sold back down in choppy trading to the opening level, only to rally back to close flat at lunch. PM Opened higher but trended lower to 26,735 before bouncing back to flat. Currently +9pts (unch) @ 26,810

Topix opened higher but again trended lower in choppy trading before rallying into lunch. PM opened higher but sold down to the day low 1,770 and bounced Currently flat @ 1,773

Data

Services PMI Nov 47.8 vs 47.7 Oct (F/cast was 46.7)

Composite PMI Nov 48.1 vs 48.0 Oct (F/cast was 47.0)

S KOREA  

Markets opened late due to annual college entrance exams.Kospi opened flat 2,686, after pre market Foreign Exchanges Reserves were better than expected. Market traded sideways for the first hour before seeing an uptick to 2,688 before selling back down to flat. Then another rally to 2,691 before again selling down to flat. Currently +11pts (+0.4%) @ 2,687

Kosdaq followed a similar trading pattern but trended higher to 906 and only drifted lower and now drifting higher currently +6pts (+0.7%) @ 905

Data

Foreign Exchange Reserves Nov $436.38 vs $426.51 Oct (F/cast was 420.7b)

TAIWAN 

Opened flat and initially traded lower to 13,950 support before working higher and breaking through 14,000 to 14,050 before selling back down currently -12pts (-0.1%) 13,977 and trading sideways.

CHINA Opened slightly lower ahead of the Caixin Data and sold down to 5,034 before rebounding to the opening level at lunchtime.  PM market opened lower and the rebounded but seeing resistance at it approached yesterday’s closing level. Currently -11pts (-0.2%) @ 5,057

Data

Caixin Services Nov 57.8 vs 56.8 Oct (F/cast was 56.4)

Caixin Composite Nov 57.5 vs 55.7 Oct (F/cast was 55.4)

Saw a recovery in consumer demand but inflationary pressure being evident, sentiment was +VE

HONG KONG 

Opened at 26,623 +90pts vs +99pts ADRs with Ecommerce and Developers +VE Market drifted lower initially ass govt said it would not roll any massive relief measures but around 10:30 rallied to 26,780 level as Carrie Lam said she would gradually broaden mutual market access between China and Hong Kong. Market then eased back into lunch. At lunch Ecommerce names were strong along with HSBC and Stand Chart but Chinese Financials and CITIC was weak. PM opened lower but trading higher Currently +173pts (+0.6%) @ 26,700

Data

Pre market PMI Nov 50.1 vs 49.8 Oct (F/cast was 49)

EUROPE Expect markets to open lower ahead of PMI data and US Initial claims

Data

EUROZONE Services and Composite PMI, Retail Sales, ECB General Council Meeting.

GERMANY Services and Composite PMI

FRANCE Services and Composite PMI, Retail Sales

UK Services and Composite PMI

US Futures opened flat for Dow and S&P, the NDX futures were +0.1%; Initial claims and PMI data will be closely watched tonight and the bond market is in focus at the US T10 flirts with 1%.


FT Front Page

Screws tighten on HK dissent. Focuses on the jailing of Joshua Wong and Ivan Lam for arranging an unlawful assembly.  But their cases are just the tip of the iceberg for the clamp down on freedom of assembly and speech.Read also Hong Kong activist Wong jailed over protests.  Notes that the sentences handed down were much harsher than any previous ones; the magistrate said 'it was “necessary to emphasise deterrence and punishment” in handing down the sentences, accusing Wong of challenging the authority of the police in demonstrating outside its headquarters.’  Seems that challenging authority is more serious than causing damage or being involved in violence.  


EU divisions mean London will remain Europe’s financial heart, says UBS head. An interesting take and revealing that Europe really is not a single entity but a group of countries trying to work together but still having vested interests in their own economies.  Mr Weber makes the point that '“The division of Europe is a massive benefit to the City of London because if Europe were united the impact . . . of Brexit would be much more,” Mr Weber said. “It’s all about competition between financial centres within Europe, Frankfurt against Paris. It shouldn’t be a zero-sum game.”  He added: “Unfortunately, it’s a European habit to play the national card as opposed to the European card. It has made Europe weak in the past. It will continue to do so in the future.”’The Brexit talks are still hanging and even if there is a deal Financial services are not included and so bankers, funds and investors are left hoping that there will be some common sense and regulatory equivalence will be granted.


Inside

FT BIG READ. EQUITIES. Welcome to the ‘everything rally’

Fuelled by the news about several effective vaccines, the prospect of a rebound in the global economy is driving a bull run across many different markets, despite the long-term damage caused by the pandemic.Notes that cheap money that is easy to borrow is driving equity markets higher; retail investors and institutional ones are very active. News of various vaccines has ignited shares that had been shunned like 'energy stocks, airlines, hotel groups, European banks, smaller US companies and emerging markets’. The only suffers so far seem to be US Treasuries and Gold.

But increasingly commentators are becoming cautious on the basis that a vaccine is good but we really don’t know how much damage has been caused to the economy and how it will recover and adapt.

Notes the early stages were powered by fiscal and monetary stimulus and the prospect of it continuing for years. There was the Goldilocks US election outcome, then the discovery of various vaccines which are expected to be more effective than previously thought. That coupled with the stimulus is expected to drive a huge growth spurt in 2021 and better corporate profits.

Then most recently Janet Yellen proposed as US Treasury Sec with Powell at the Fed. It has resulted in money pouring into equities (GS estimates that US shorts are at their lowest since 2004). All this before the vaccinations has started.

A big concern for some fund managers is that everyone is consensus.

Other concerns are the current resurgence in covid cases globally and the impact that will have in scarring the global recovery. Also the run elections in Georgia with could give the Democrats control of the Senate. Another possibility is that governments withdraw stimulus and aid too soon. Also the rise in Bond yields which it is continues could suck money out of equities.

I also think the return of inflation could be an issue especially with increased levels of debt at many companies; those are likely to weight down the growth potential.

Another point it makes in summary is that as the inoculations take place and normality returns investors will be reminded of the problems with the economy that predated the pandemic and which have been exacerbated by it but will not be cured by the vaccines.

A good read. The key will be to focus on good companies that are well run. I would also be inclined to stay with good liquidity too because when the sentiment changes there will be a lot of people; institutions and retail looking for an exit.


Manufacturers return to tap India market. Modi government rolls out incentives to compete with China and Vietnam.  Looks at how India is benefitting from companies desire to diversify supply chains out of China.  Cites the case to Salcomp taking over a factory that six years ago Nokia left because of a tax dispute and moved its production to Vietnam.  It makes the point that India has a lot to offer which is why Apple manufacturers such as Wistron, Foxconn and Pegatron are setting up there.  Govt incentives under New Delhi’s ambitious production linked incentive (PLI) scheme make it attractive but it is still producing mainly low added value products and still reliant on China and others for the critical hardware components.  
The govt is looking to expand the scheme to other sectors but some are concerned that the scheme is too inward looking and that the theme of self reliance means that the country is missing export opportunities. Which considering that India pulled out of the Regional Comprehensive Economic Partnership look to be well founded. There will also be continued concerns about ensuring things like tax dispute and other issues do not spoil the potential. At a time when China is likely to face more pressure from a united approach to negotiations about opening up market as Biden takes over India will need to make itself attractive to companies and investors.

Australia allies urged to buy wine in solidarity. An unusually marketing campaign but the article notes that 'The Inter-Parliamentary Alliance on China, which has a membership of 200 MPs from 19 countries, asked citizens in a video to swap their favourite national tipple for Australian wine in a demonstration of solidarity with Canberra.’  Follows the recent diplomatic spat between the China and Australia, where China is trying to leverage is position as Australia’s biggest trading partner to get Australia to refrain from commenting on Chinese policies or actions; especially with regard to human rights.   The article notes that 'Mr Morrison made a direct appeal to the Chinese public yesterday via WeChat, the social media platform, saying the provocative tweet would not diminish Australia’s respect for the Chinese community at home or abroad. But he said Australia would remain “true to our values and protect our sovereignty”.’
It should also be remembered that China is seeking to build a peace accord in Afghanistan in order that its Belt and Road Initiative can secure a safe route through the county as it looks for an overland link to the Middle East.

Shares in Xiaomi drop after $4bn fundraising. Also LEX Chinese smartphones: Xiaomi the outlook  Looks at the share top up placing and CB issuance.  It said the money was for “strengthening working capital for business expansion [and] investments to increase market share in key markets”. The key is that it is acknowledged to operate on razor thin margins which is helping to gain market share.  So as there is currently plenty of liquidity in the markets; it has tapped into it can because in a few months time it might not be able to.

SoftBank casts adrift ‘whale’ options trades after backlash  But as the article points out it has draw further questioning about the structure and governance of the organisation; not least the fact that Mr Son had a personal 33% interest in the profits of a specific division.   For the time being Softbank has said that it will focus on long term investment into AI and other leading technologies.  But with Mr Son’s track record and the teams that he has in place it will be interesting to see how long that lasts until another derivative is thought up.

Biden considers appointing Asia tsar. New role would reflect increasing challenges presented by China and the importance of the region.  That could be very useful in rebuilding US ties in the region.   The article notes that 'Sensitive issues range from Chinese human rights abuses in the Xinjiang region to Beijing’s efforts to clamp down on the pro-democracy movement in Hong Kong. Those challenges come against the backdrop of a growing bipartisan consensus on Capitol Hill that the president-elect must take a tougher stance on China.’  An interesting read about the various options being considered but the key is the recognition that Asia and not just China is important.

Regulators to examine banks’ lending caution in pandemic. The Fed is disappointed that a number of the creative measures it announced have not worked as it had hoped.  Banks did not use the opportunities provided by the ‘cushions’ that the fed provided.  The Fed also noted that banks had served a role in providing credit and had boosted their capital reserves in case of further downside from the pandemic; albeit because the Fed restricted them buying back their own share and from raising dividends.  
I think the key still lies with the banks perception of the risk to their business. Whilst accepting that the Fed would allow them to take on more risk, the banks would view it as too great a risk in an uncertain period. In essence it is the difference between the hypothetical and actually putting your own money on risk. The trouble for many regulators it that they can see the theory of some courses of action but with no actual ’skin in the game’ they fail to realise that real potential downside.

Lithium trading on the charge as electric vehicle sales surge. Value of the battery material is steadying after a slump — and related shares are rallying.   Prices have rebounded from the lows but those lows caused problems for some miners. So whilst the growth in EV’s is driving demand but there are warnings.  It gives the example ‘In October, Australian lithium miner Altura went into administration after it failed to raise enough funds to pay off its debts. This week, Pilbara agreed to acquire Altura’s lithium project for $175m, in a deal backed by Australia’s largest pension fund, AustralianSuper.’ But there is no incentive to restart the project at present as today’s prices do not justify it. In the US Livent is taking a stake in a Canadian miner Nemaska Lithium who went bankrupt last year.
Key players in the sector include; Albemarle, Pilbara Mineral both has seen huge share price moves, China-based lithium producer Ganfeng Lithium and LiventFor investors there is obvious potential, as current inventories deplete but still scope for over supply remains, so it will be important for the sector to be more disciplined

EM cycles show quality beats value in the long term. Looks at the lessons from past cycles and events like 1997 Financial crisis, Lehman’s failure, and the past 8 years.  
With that in mind he notes 'Emerging markets trade at a 20 per cent discount to developed ones on a sector-adjusted basis, close to a 20-year low. A weaker dollar should allow emerging-market currencies to appreciate, along with equity markets, buoyed by relief on a collective $5.2tn debt burden. A lower dollar would also benefit commodity exporters.
But investors should temper their enthusiasm for 2021 with the knowledge that debt levels, demographics and investment for a more sustainable economic system may constrain profit growth over the medium term.
Slower macroeconomic expansion will ensure that growth and quality retain a premium. In the short term, value will have its day in the sun. But for investors with a longer time horizon, quality will remain king.’
I think its reasonable to say that quality in the long term usually does well as long as management remains good and focused.

For interest Battle to balance the books is lost for Paris legacy retailers. Looks at how the pandemic and the switch to on-line purchases has killed a lot of the Paris retailers. The landlords, who previously benefitted from the tight planning regulations, are now seeing rents drop significantly and are having to consider new options for their properties.  Whilst it is not clear whether the changes in habit will be permanent sue are willing to try new things.  Notes a grocery store the now offers co-working space. Also cites 'Renny Aupetit, an independent bookshop owner who bought another Gibert Jeune store on the Right Bank. He plans to spend €1.5m on renovations before reopening as the Co-operative of Ideas, where employees are part-owners, and books on social issues and the environment have top billing.'

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