Dec 30 FT thoughts: China stagflation a problem, Indo SWF, BHP restarts Samarco


30 Dec

MARKETs @ 1:30pm HK time
JAPAN 
Market will be closed Thursday 
Opened slightly lower having hit a 30 year high on Tuesday. Traded down the 27,340 level and then traded sideways into lunch. PM opened higher and working higher Currently -99pts (-0.4%) @ 27,470
Topix traded in a similar pattern currently -11pts (-0.6%) @ 1,809
S KOREA  
Pre market data mixed but markets working better ahead of market being closed tomorrow.
Kospi opened flat dipped briefly but has trended higher through the day currently +44pts (+1.6%) @ 2,866 a new high.
Kosdaq opened flat and traded like the Kospi currently +13pts (+1.4%) @ 970 a new high
Pre Market Data 
Business Confidence Dec 82 vs 85 Nov (F/cast was 80)
Retail Sales Nov -1% MoM vs -0.9% Oct (F/cast was +1.5 )
Retail Sales Nov -1.5% YoY vs -0.2% Oct (F/cast was -0.5%)
Industrial Production Nov +0.3% MoM vs -1.2% Oct (F/cast was +0.9%)
Industrial Production Nov +0.5% YoY vs -2.2% Oct (F/cast was +1.2%)
Manufacturing Production Nov +0.7% YoY vs -2.2% Oct (F/cast was -2.5%)
Construction Output Nov -0.8% YoY vs -8.9% Oct (F/cast was -5.5%)
TAIWAN 
Opened higher and trended higher with buying accelerating at the end to close +207pts (+1.4%) @ 14,679 a new high.
CHINA 
CSI 300 opened flat but rallied in the first hour to 5,093 and the worked better into lunch. PM opened higher tested 5,100 but didn’t break above and has eased bak slightly Currently +56pts (+1.1%) @ 5,098
Data China’s 2019 GDP growth was revised to 6.0% from 6.1%.
HONG KONG 
Opened @ 26,695, +126pts vs -74 ADR’s E-commerce names seeing good interest including Baba +5.8%. Financials and Green Energy names also seeing interest; generally a broad recovery.
EUROPE 
Expect markets to open higher following the lead from Asia. Data Nationwide Housing Prices but we could hear more about the EU/China trade deal
US Futures 
Opened higher but have eased slightly Dow +36pts, S&P +0.1% and NDX flat. Mnuchin says stimulus cheques will start going out tonight.

Beijing grapples with stagnant inflation.  Consumer price index falls into negative territory for first time in more than a decade. Whilst many indicators for the Chinese economy have show it is in recovery mode the CPI shows that household demand remains subdued.  I have mentioned this often in the past few months.  Ordinary Chinese citizens are not confident in the recovery or in many cases are still being owed wages.  
It notes that core inflation has remained at 0.5% for the past 5 months. It does say that gauging inflation is more difficult during the pandemic because of the changes in household behaviour regarding the basket of goods and services consumed. With the tourist and travel element being particularly depressed.
But not all prices in China are depressed the producer price index which had been negative since February on an annual basis actually rise month on month in November but that is driven more by a recovery in demand from western countries buying China's exports.
Stock prices have also risen but that has been on the basis of the recovery and the the good data provided. Home prices have also risen although there are concerns over the leverage in the property market both a company level and individual level. A lot of middle class landlords who rented out flats to migrant workers are under pressure and their disposable income has seen a double whammy from the lack of a tenant and the fact they still have to pay their mortgages. Some have had the further pressure of having to accept pay cuts in order to keep their jobs.
It does note that China’s CPI does not include home purchase but does include renting.
It mentions the labour market which is seeing a recovery too and is now back to pre-pandemic levels. But again one has to be careful with the unemployment data as it excludes migrant workers due to the haikou system.
Also there have been a number of reports about how the SOE’s haven’t laid people off but equally haven’t paid them wages either, which again would distort the numbers and also reflect the lack of domestic demand.
Finally there is the very Chinese trait that when they are confident they will spend but when they are not the save. Unlike the west were people tend to slow their spending in China its more about the tap being turned on or off. So for some they are still spending; the rich. LVMH, Gucci etc are still seeing good sales. The rich in China are largely unaffected but they are a small part of the overall population.
That poses a problem for the PBoC and Government. Policy to date has been about getting manufacturing and industry back to work. But negative inflation puts pressure on households and businesses by increasing real interest rates and leaving less disposable income. So whilst much of the data suggests the PBoC should raise rates in 2021 it may have to lower then. That would hurt its currently attractive bond market (albeit with some recent embarrassing incidents) but it would also send what could be a misleading signal to the markets about policy from the PBoC.
I still think there are a lot of good opportunities in China but careful due diligence must be under taken because there are a lot of potential pitfalls as seen in the recent defaults. Many of the SOE’s are under severe pressure to reform but also are unable to cut their workforce. It is the dilemma of the Command Economy.
President Xi’s solution is the ‘dual circulation’ strategy although so far the details of how that will work have yet to be revealed. In the meantime I think Chinese consumers are going to remain cautious.

US widens China crackdown to subsidiaries Investment ban scope extended after lobbying by state department.  Looks at the clarification of trump’s recent executive order on Chinese companies; specifically stating that it did apply to subsidiaries of companies sanctioned.  The Treasury department is expected to now publicly list all such entities.  It also made it clear that the ban applied to ETF’s and Index Funds.   That is likely to mean many funds will set up separate funds that   allow non US citizens to investing Chinese companies still, whilst having separate funds for US citizens.  
Still it is a significant -VE for China, especially as it appears unlikely that Biden will remove any of these measures in the near future.

Indonesia seeks extra investment for sovereign wealth fund.  Having got $15bn in the first tranche its now looking for more.  It will be watched closely as the fund 'represents the first serious test of a package of sweeping reforms passed by Indonesia in October that are designed to attract foreign investors to the world’s fourth most populous nation as it seeks to counter the economic impact of the coronavirus pandemic.’    It has also had to deal with the bad publicity of Malaysia’s 1MDB scandal.   But it has secured investors and it is good to see the it is taking advice from other funds like ADIA.  Investors mentioned include Caisse de Dépôt et Placement du Québec, APG, US International Development Finance Corporation (DFC) and the Japan Bank for International Cooperation.
Key will be the yields being offered on the projects that it will invest in, but those yields also reflect the risks. But there is a lot of infrastructure that Indonesia needs and a lot of projects that could be built. The real key is for the fund to invest on those projects that are going to bring real benefits to the economy. Worth watching the infrastructure related names and also the resources names who should benefit.

Toshiba holds emergency meeting after activists revolt. The company remains under pressure following its recent AGM.  Investors are accusing it of deploying ‘dark arts’ in order that the management would survive its July AGM.
Now it is facing calls for EGMs; one to investigate how the AGM was conducted and the second for clarity on its M&A ambitions. EGM’s in Japan are rare, a last resort by investors and that means that Nobuaki Kurumatani, the chief executive is under the spotlight.
It is interesting too that they have called on Goldman Sachs for help as it was Goldman's that advised the company going into the AGM on anti-activist measures.
Questions are also likely to be asked of Hiro Mizuno, former chief investment officer of the Government Pension Investment Fund who was said to have influenced how the Harvard University endowment fund.
It is likely to raise again the question of whether Japan boards act in their shareholders best interests or for themselves along with the use of influencers. I am sure more will out in the days to come. It is likely that CEO who had been expected to lose his job will now be forced out and then the question will be who will replace him.
Toshiba’s share price like many hit the lows in March but then by July had rebounded to 87% of its pre pandemic level but has since July its down 20%.

BHP and Vale restart Samarco after clean-up.  Key because this will impact the iron ore price that has been rocketing through 2020 to a nine year high.   BHP said it would initially start with 8m tonnes a year.

Sitting pretty Covid demand earns Samsung’s imperilled LCD television factories a reprieve.  Samsung was going to stop production in 2020 after a decision made in 2019 and focus on LED technology. But now it will continue until at least Q1 2021 due to record demand. +VE
Should be good the bottom line.

Fatuous to believe passive investing will blow up trading. Starts with a great quote 'Two young fish swim through the ocean, passing an older fish, who says: “Hey boys, how’s the water?” The two younger fish swim on, until one turns to the other and asks: “What the hell is water?”
‘The article looks at the impact of passive investing on the wider markets as put forward by Michael Green, chief strategist at Logica Capital Advisers. 'In some respects, it is almost like a “theory of (almost) everything” for financial markets and he has turned it into a personal crusade this year. The arguments are compelling enough to warrant examination.’
It’s basically the argument the more that goes into passive investment the more likely to the market is to follow that consensus. Notes that a lot of market moves take place overnight because it suggests passive funds tend to do their buying or selling in the closing auctions.
An interesting read and summarised well in the closing paragraphs
'Most of all, the theory that passive investing would inevitably blow up and rip a hole in financial markets when the tide recedes seems a little fatuous today. In the past 12 years passive investing has been tested by the 2008 financial crisis and the 2020 pandemic and emerged largely strengthened. Even some sceptics now quietly admit the structure may be more resilient than they had previously thought.
Finance has a tendency to take all trends too far and passive investing will undoubtedly prove no different. But we are not there quite yet and it is doubtful we will be for years to come.'

For interest
Pandemic gives Amazon’s ads business its day in the sun. Overlooked unit booms on back of ability to focus on consumers’ buying habits.  Late to the area relative to Facebook and Google but growing market share quickly and interestingly attracting advertisers who do not sell on its website but who want access to its purchasing data in order to target potential clients.

US Goliath tramples David in K-shaped 2020. Titans from Starbucks to Mondelez grow in clout while rivals lacking scale, top brands or robust finances nurse wounds.  Other winners mentioned include Amazon, Hershey, Walmart, Target, Costco, Home Depot.  
It notes that the companies 'typically invested more in the digital tools that became critical as employees and customers scattered.’
Also that customers were looking for brands they could trust and frequented stores with a wide range of goods ’trip consolidation’.
It also notes the losers that smaller brands/stores and especially those that had fragile balance sheets like Hertz.
A good read and prompts one to wonder if when vaccinations have taken place whether those shopping traits will continue and whether the smaller brands/stores will have survived?

Fintechs drawn to rich pickings reaped by Latin American banks Looks at how  those banks which have been so profitable are now under attack.  An interesting read considering the regions poorly performing economies.

The Big Read GRAPHICS. The year the charts became the storyData and graphics were the bedrock for a lot of coronavirus reporting, from excess deaths to transmission rates and the economic fallout for individuals and countries.

Editorial Blame not the robot but the human behind it Building public trust in artificial intelligence systems is essential.   Key being that algorithm’s do what they are programmed to do.
'If companies and governments fail to assure the public that they are trustworthy in their handling of data and their use of AI systems then there will be increasing public pressure for heavier-handed regulation. And the case will grow stronger for creating the equivalent of a US Food and Drug Administration to preapprove algorithms used in sensitive areas, such as healthcare and the judicial system.’

Opinion Resist a false divination from the Covid crisis  Notes that the covid crisis has been different to all previous crisis.  
'Beyond the tautological — good government is preferable to bad government — the world has amazingly little insight to show for its year of anguish. Its challenge is to resist forcing a narrative on to facts that do not support one. Ambiguity and confusion are difficult enough to live with. Commitment to the wrong kind of change would be vastly worse.'

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