Sept 12 FT Weekend. Inflation, Disney's China, Audit fit for purpose? and more


16 Sep

Sept 12 FT Weekend. Inflation, Disney's China, Audit fit for purpose? and more

US inflation ticks higher but demand remains weak. The third month of rises as the economy continues to recover.  Which comes as the Fed changes its policy to allow for ‘average’ inflation targets.  It hit its highest level since the pandemic.
Economists cautioned that the price rises might not continue, since they were in part driven by inventory shortages and that the economy was still seeing weak demand and high unemployment with as lot of slack in the labour force. The Fed is not expecting to reach the 2% target any time soon.
But a number of people remained worried that inflation could be the big unknown factor; with some much stimulus and talks, expectations of more to come. US PPI was also higher than expected this week. For Gold its still hovering around the US$2000 level. FOMC meeting this week, with many expecting talk of more easing could see be a driver. That will be the last FOMC meeting before the US election so expect it to be under extreme scrutiny.


FT BIG READ. DOING BUSINESS IN CHINA. Xinjiang: where Disney fiction meets harsh facts
Film studios now rely on the Chinese market for ticket sales. But Disney has been heavily criticised for shooting scenes from ‘Mulan’ in a region where the government operates internment camps.
It does of course beg the question to start with as to why they picked Xinjiang? When the film started filming in 2018 the issues surrounding Xinjiang and the Uighurs were being publicised.
The article looks in some detail at the business links in Xinjiang and how they are coming under pressure to decouple from the region as the US and others try to put pressure on China not to abuse the human rights of its muslim citizens in the region. But it also highlights how many western companies still view China as a hugely important market for their products.
Many companies have already put in place policies not to use products from Xinjiang and the US last month sanctioned the'Xinjiang Production and Construction Corps, a quasi-military organisation that operates like a branch of government and runs many of the region’s largest state-owned enterprises, producing about 30 per cent of China’s cotton.’ But there is no standard policy from the West and to be truly effective there needs to be a united approach as there was against S Africa in the days of apartheid.
It makes clear that part of the problem is that Xinjiang touches so many parts of the Chinese economy. A key part of the Belt and Road scheme but also; 'The region produces nearly 90 per cent of China’s cotton, its coal reserves make up about 40 per cent of the country’s total and the Tarim Basin in its north-west is one of the country’s largest oil and gas repositories. Xinjiang’s farmers are some of China’s leading producers of grapes, tomatoes and melons.’ It is also a leading supplier to factories of cheap labour.
Disney along with other film makers is also being criticised for its desire to get into China’s good books by currying favour with its censors to be allowed to distribute films within China. In some cases by inviting the censors on set to advise in the film as to what will be acceptable. Disney is particularly aware of the having had its film banned after Kundun a Martin Scorsese film about the occupation Tibet. Disney then spent 20 years trying to get back into China and succeeded after Michael Eisner apologised to Zhu Rongji in 1998 but it wasn’t until 2008 that it got an agreement to build the Shanghai Theme Park with a number of concession to local Chinese companies.
With Mulin Disney went to get lengths to ensure the film would be well received by Chinese authorities and audiences. As a chief film executive notes you have to understand the nuances in China otherwise you get into trouble. Which is important as China is about to surpass the US in terms of box office revenues.
But Mulan had a slow start; not least because authorities told major media outlets not to cover Walt Disney Co’s release of “Mulan”, in an order issued after controversy erupted overseas over the film’s links with the Xinjiang region.
Some Chinese watchers were still disappointed 'Li Junze, a 36-year-old who runs an antique bookstore in Dan-dong city, says he prefers the 1998 cartoon version. “Despite being all Chinese faces, it still feels so American. I don’t think westerners know how to tell Chinese stories,” he adds.’ That is a cultural issue Asia made films are still significantly different to western ones.
Critics have said that the film supports the Communist Party’s official line on its version of Chinese history which is common in Chinese made films but unusual in a US film says one critic who feels that 'There is this magnification of the narrative that the only way for there to be a civilised China is to quash the western rebellion,”’
I haven’t seen the film so don’t know on the one.
It does illustrate how much compromise is still being undertaken my western companies trying to get access to the Chinese markets. Whilst commerce sees profit in China and in the absence of a united policy on the abuse of human right in China, there will be no real change. The boycott of S Africa took about 8 years to effect change; and I suspect China would be more resistive; but piecemeal action is unlikely to have much impact.


Pressure increasing to load up on cheap debt during calm before US election. Bankers are warning that the Presidential election is likely to turn currently calm market into a disrupted one making it difficult for companies to get access to funds on favourable terms. Claiming that the November election “about as clear a risk factor as you have going into year-end,” said Jonny Fine, head of investment grade debt syndicate at Goldman Sachs. “It is not a difficult argument to make to an issuer of ‘why are you waiting, you have financing to do, you have one of the best environments right now, and you have the potential for a lot of volatility in November’.”
Bankers are also worried that as winter approaches there could be more covid outbreaks that might impact liquidity.
I think the key statement from one banker sums it up “It is hard to advise someone that they should be waiting [to issue],” said Andrew Karp, head of global investment grade capital markets at Bank of America.
But I suspect a lot of companies that are suitable to tap the markets have already done so. They will have regeared their debt to take advantage of the current conditions, buying in older debt and issuing new debt with extended the maturities. Now they are eating for the recovery in demand for their products and services.


Don’t be a hero, preserve your cash when everyone wakes up and blinks. By John Dizard.
Basically makes the point that there is still no real sign of a return in demand. That consumers are paying down debt. Companies that are still operating are cutting Capex. That historically September and October are times of cash shortages; that has been true since farmers started bringing crops to market. Its when LTCM went bust because it couldn’t fund its short-Bunds position. When Lehmans failed and the repo markets ran out of liquidity last year. With problems looming for commercial property lenders are evident.
So he suggests turn to cash.
In some ways it makes sense but in many cases holding cash actually costs you money; certainly if you have a lot and leave it with the bank. Also if you had held cash since March you would have missed out on the equity rally. Investors today as before need a balanced portfolio albeit not in the same historical: third third third allocations. Bonds and cash seem to be under pressure. Gold and some other resources offer some protection; Nickel has done well over the past 6 months and has recently pulled back from its highs and maybe worth considering with its demand likely to increase as electric vehicles become more predominant. I still think that some areas of property remain good investments and whilst offices may be in for a tough time data centres are on everyones interest list. The key is that as has always be true investors need to be diligent in looking at the opportunities and not just follow the momentum.


Good times for big US banks cannot last under Biden. By Robert Armstrong. Suggest that under Biden the US banks will see increased taxation and regulation. But he does note that under Trump bank stocks are -17% so whilst policy and taxes matter economic growth and interest rates matter more. An interesting read.

For Interest
Sweden swims against the tide. 
Anders Tegnell, the architect of a controversial light-touch approach to containing Covid-19, believes lockdown is ‘using a hammer to kill a fly’. Could he be proved right? Richard Milne reports. Well worth a read.
An interesting interview with a number of interesting points. The system in Sweden that has given power to the likes of Anders Tegnell rather than politicians to make such decisions. His belief in the concept of herd immunity. The realisation that lock downs have huge knock on impacts. The limitations of face masks in public but he need for social distancing measures in crowded areas. That a vaccine is not going to the be a 'solve all problems’ solutions. It will help but covid mutates and early vaccines will need to be refined.
I wonder too if covid’s ability to mutate could mean that when vaccines are introduced it could develop along the super bugs that now occur in hospitals. Bugs that over time haven’t been killed by the cleaning agents and disinfectants but grown stronger having been exposed to them! Not that would be a worry.

ON LINE edition has Is audit fit for purpose?
The key seems to be that audits were designed in an era when companies owned ‘factories and inventories in the yard’ and the balance sheet comprised physical assets.
Most of today’s companies are very different to that but effectively get audited in the same way.
It notes that audit rules have been adapted and revised to try and keep up and whilst there has been various re-writes, the truth is that they are still based on the original principles and those don’t really reflect how modern, non physical asset based companies work.
There are alternate standard setters as well and the growth of ESG too. They are under going change and talking to investors but if the basics are wrong it will not result in something that is fit for purpose. As summed up by;
‘Natasha Landell-Mills, head of stewardship at Sarasin & Partners, a UK asset manager, says there is a question over whether the auditor is trying to implement and ensure compliance with accounting standards, or whether it is to give shareholders and other stakeholders a “true and fair picture of that business, in particular the level of capital and reliability of those profit numbers”. She cites the example of Carillion, which collapsed despite “apparently following all the right accountancy standards”.

That to me is the key.
So rather than update and try and close loop holes after serious breeches occur they really need to start with a clean sheet of paper and address how to give shareholders and investors a true a fair picture of the company, its capital, its profit and an indication of how reliable the numbers really are. The article says that investors don’t take enough interest but I would counter having paid a professional a large sum of money to undertake a job the shareholders should be able to rely on that company to say if the accounts are true. But often the problem is that shareholder and investors don’t understand or know the terms on which the auditors were appointed, or the scope that they were given to could operate under.

BUT the real crux comes down whether auditors follow the actual wording of the accountancy rules or the spirit of what they are trying to accomplish. In today’s litigious world, unfortunately they adhere to the wording not the spirit. Hence the need for a clean sheet of paper.

There is a similar problem in broking these day too. With ever increasing regulation grey areas can occur. In the past in Hong Kong it was possible to go to the regulator and have an off the record discussion. That would often result in the regulator saying you stop doing it and we’ll amend the ordinance to make it clear what is allowed, with no one being prosecuted but the law being clearer and nobody getting hurt. Today that isn’t possible and as a result the system is the poorer. Now, as in the US, firms find loop holes and try to make as much money as possible before being caught and then hoping the fine calculated is less than the amount of money made. Not a good way of protecting investors in my view.

In my view it because regulators like auditors are more interested in not being blamed than really caring about the profession they are supposed to be serving. Unfortunately professionalism like auditing is not what it used to be.


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