Sept 18 FT Thoughts Arming Taiwan, Arm/Nvidia, Sony future and lots more

22 Sep

Sept 18 FT Thoughts  Arming Taiwan, Arm/Nvidia, Sony future and lots more

Feedback welcome, hope you enjoy.
Andrew Sullivan
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MARKETs 1:45pm
opened opened slightly higher and rallied on positive inflation data but resistance at 23,400 level and then trended lower in choppy trading to 23,290 where it found support and bounced into lunch. PM opened slightly lower but trending higher Currently +0.1%
S KOREA Kosdaq opened higher at 890 and ticked higher initial before selling down to 878 support, which was tested a couple of times and them the market worked back into the green. Initially traded sideways now drifting lower currently -0.2%
Kospi followed a similar trading pattern currently flat.
TAIWAN opened lower and traded in an 90pt range. Initial ticked higher but then sold down to 12,840 level which was tested a couple of times, before working higher to 12,930 resistance which was tested a couple of time, consolidated to yesterday’s closing level and then worked higher currently flat
CHINA opened slightly higher and traded slightly (+20pts) higher in the morning. PM opened higher and rallied to 4,713 (+50pts) but now easing back; Currently +1.4%
HONG KONG Opened +40pts @ 24,382 vs +106pts ADRs @ 24,446. Tencent weak as it may be a US target for US gaming. Alibaba weak too. Xiaomi and Meituan +VE Tech mixed other stocks broadly +VE. Initially ticked lower before bouncing back to 24,450 which was resistance for the morning. Market then consolidated around yesterday’s closing level before working higher into lunch. PM working higher currently +0.4%
EUROPE Expect markets to lower following the US. Data due EUROZONE Current Account, GERMANY PPI, UK Retail Sales.
US Futures Opened -30pts but ticked up to slightly +VE but basically flat. S&P and NDX futures still flat. Data due Current Account, Michigan Prelim Data (Current Conditions, Inflation Expectations, 5 Year Inflation Expectations, Consumer Sentiment and Consumer Expectations), Leadings Index, Baker Hughes Total Oil Rig Count.

Markets are interestingly poised many still expect a further sell off but buyers on the sidelines who are overweight cash are cautiously returning suggesting a limited downside. But key for the US still remains a new stimulus package without which the risk of more downside is increasing.

US plans $7bn arms deal with Taiwan. Washington to bolster Taipei’s defences as China ratchets up military threat. Whilst being a big deal and obviously good for the defence contractors the reality is that it will make little difference if China does decide to invade Taiwan. The sale is thought to include sea mines and coastal defence cruise missiles and drones; which could slow any attack and make it costly for China in terms of men and equipment. The US is keen for Taiwan to adopt mobile and less expensive weapons to fight a guerrilla like war with China. It also reflects the fact that the threat from China has grown considerably. It notes that previous purchases of F-16 jets had been a priority for Taiwan whilst impressive they would be vulnerable just because of the sheer number of Chinese aircraft they would be up against.
Tensions have risen too as Keith Krach a US state official arrived in Taiwan for the memorial service for Lee Teng-hui, the former Taiwan president.

Lex. Nvidia/China: Armed and dangerous. China is worried that Arm’s takeover by Nvidia will end its hopes of tech dominance. If Nividi gets Arm then the US will control 'an irreplaceable technology. It is especially crucial for gadgets made in China; 95% of locally designed chips use Arm technology, including Huawei. Those chips power key industries, everything from facial recognition to drones, on which China has bet its economic future.’
If the companies push ahead in the face of Chinese opposition they face losing sales in China and the growth of the Chinese Data Centre market, which is area Arm is designing chips for. Nvidia is key to China for its AI chips. 'Sales to cloud-service providers and gaming companies have been key to offsetting a slowdown in its server segment. Nvidia’s high margin automotive business could target the world’s largest auto market as it moves towards mass production of self-driving cars.’
Arm’s model is based on licensing which gives it access to 'confidential data such as chip production volumes and the plans of its clients — which include TSMC, Samsung and Qualcomm. Chinese companies will not be alone in feeling wary at the idea of rival Nvidia gaining access to their secrets.’
So Nvidia is getting a great deal but it will be the regulators not rivals who are the main threat to the deal and China will probably big the biggest.
Another example of how China’s ambitious plans can be floored by its lack of technical ability. It has realised the deficiency but catching up is almost impossible unless you can acquire the latest technology and nobody is currently selling.

Sony set for console showdown with Microsoft. Group unveils PlayStation 5 in what may be final face-off as gaming technology evolves. Key here is that it is expected that going forward the contest will be about the games and not the hardware. There has also be a move to mobile and tablets for the playing of games. Digital games are expected to make up a larger proportion of sales going forward; the article notes from 51% now to 80% in five years time.
It also notes that the business models have changed from selling one time purchase discs to a service model capable to generating revenue for many years from the purchase of added content.
For Sony it also has the challenge of 'of seamlessly integrating its subscription services to compete not only with Microsoft but the likes of Amazon, Netflix and Apple.’ With the PS5 determining whether Sony becomes one of the top plays in the business.

TikTok rival prepares for Hong Kong listing. Chinese short video giant Kuaishou is preparing to raise $5bn in a Hong Kong listing, probably in Q1 2021. It used to be the leading short video app in China before being overtaken by Douyin, the Chinese version TikTok. The article says it was considering a US listing but decided on Hong Kong due to US/China tensions. The differences between the two are that ByteDance is said to have a better advertising business but Kuaishou has more engaged community of users; more of a social network. But both are seeking to invade the other’s business territory. The article notes that 'In China, Kuaishou is more popular among users in smaller cities and rural areas. It has also pushed faster into live-streaming and ecommerce. This year, it launched an overseas video-sharing app called Zynn, which was hit with accusations of plagiarism. The app had hit the top of download charts by promising cash payouts to users, but was eventually removed from the Google and Apple app stores. It has since been reinstated.’
It will be interesting to see the demand especially as ByteDance has proposed a US IPO of TikTok if it can get its current proposal accepted by the US Administration.

China-US investment falls to lowest since 2011. Hardly surprising considering the tensions and the increased scrutiny of Chinese investments into the US. Looks at a report which looked at flows in both directions from consultancy Rhodium Group and the National Committee on United States-China Relations, a non-governmental organisation.
The number would have been even lower except for Tencent’s purchase of a stake in Universal Music Group. Also mentioned is the fact that Chinese conglomerates had now been restricted on expanding overseas since the HNA scandal.
China is also being much more careful about allowing its large corporates to invest overseas because that is money outside of Beijing’s control.

Covid accelerates some big trends in China’s favour. Notes that China’s pandemic management has been good and that is reaping rewards. 'Better pandemic management has delivered better economic results. China is the only country among 48 to have reported a second-quarter gross domestic product number that was higher than at the end of 2019. Taiwan, Vietnam, South Korea and Hong Kong are the next closest.’ India and Spain by comparison are the worst.
It notes that the recovery in Asia has been without lockdowns seen in the west and without the handouts too.
Tech exports have underpinned a number of the strong economies. For China its been medical equipment. Analyst’s had expected covid to disrupt supply chains but the articles says China is picking up export market share.
Although I think that in the early stages shut downs in China did disrupt global supply chains and whilst it has benefitted short term from the recovery and back orders clients are looking to reduce dependance but it will take time.
It notes also the resilience of China’s balance of payments. Which has an impact on the currency markets with the USD continuing to weaken. It notes that Trump has not managed to reduce the trade surplus in part because China is behind with its agreed purchases. It expects China/US tensions to remain and for China’s resilience to continue.
I am not so sure that the optimism is justified. Supply chains do take time to re-arrange but they will. China’s dependance of US designed tech in semiconductors will remain an Achilles heel that will take years to overcome. The current surge in medical equipment will not last forever and then China will be back to its traditional exports but with Huawei and others having been curtailed

BioNTech buys Novartis site to boost vaccine output. Key being that the site means it has the capacity to fulfil all advance orders for its coronavirus vaccine from the EU, as well as export to China. But it still warned that there were downstream limitations between producing the drug and then passing it to the “fill and finish” facilities, in which a drug is formulated and put into a vial or syringe, these facilities are still lacking and that could hamper distribution.

Amazon bets on Tesla co-founder’s project to recycle batteries and reduce need for mining. Looks at how companies are aiming to 'to extract lithium, cobalt and nickel from old smartphones and other electronics for reuse in new electric batteries.’ Mr Straubel, Tesla’s technology chief from 2003 until last year, founded Redwood in 2017. He is looking to recycle and remanufacture batteries so that they can be used many times over. Also from cellphones; estimated that nearly 1bn are discarded each year; “It’s a massive, untapped resource . . . If we can recover 98 or 99 per cent of those materials and reuse them, we don’t need very much new material to keep that whole process running.” He notes that whilst batteries die after a while the key elements are still present so they can be broken down and repurposed.
It is an areas that is likely to see more and more interest from investors on the ESG side as well and climate awareness. Well worth a read.

Private equity owners pile on leverage to reap dividends. TPG and Apax load companies with loans on back of strong demand for high-yielding debt. A worrying read. Private’s equity groups leveraging the fact that investors are looking for corporate debt . So they are loading up companies they own with fresh debt and then using the cash to pay themselves. Investors get little protection and with the current economic outlook the risk is high, either that economically the companies business comes under pressure or that at some point interest rates rise and again put these companies under pressure.
Worth a read as it looks like another potential time bomb for both the companies saddled with the debt and the investors.
Read also LEX Private equity: quick recap. Key point 'Dividend recaps are not necessarily improper. But buyout firms should face consequences either in the market or from regulators if companies eventually go bankrupt. Legally, a dividend could be clawed back if a company goes bankrupt quickly after the payout. But in big leverage transactions, the consequences of risky dealings should extend for a more meaningful amount of time. If a private equity firm wants to take cash early funded by debt, fine. But such impatience should lead to scrutiny and redress for a much longer period.’
A very sensible idea in my view

FT BIG READ. TRADE. A symbol of resilience for globalisation
Although the pandemic has brought chaos to the global economy, many shipping lines are making money by pulling services and raising prices. Some operations are also becoming more regionalised and nimble. Suggests that the sensible operators will adapt to the market requirements by pooling resources and cutting some sailings thereby controlling supply rather than engaging in self-destroying price wars. But there are issues, not least that of sailors being stuck indefinitely on ships due to covid; something that will have to be address and hopefully before the arrival of a covid vaccine.
Also worth noting that China was wanting a meeting with chipping companies about cancelled sailings as it relies on exports and wanted to ensure there is space on routes.
Overall a positive outlook for shipping companies

Editorial The slow death of Big Oil has now begun Fossil fuel industry must reinvent itself to survive in a low-carbon era. Interestingly Covid has done want countless demonstrations, protests and lobbying had failed to do. Make the large oil companies realise that change is upon them. About a year ago the Economist had an article that effectively pointed out that whilst oil companies were saying the supported a change to ‘greener energy’ they were spending more on lobbying for more fossil fuel drilling and usage. That is now changing. The article makes clear that change will take time. One companies are more engaging (BP and the European producers) whereas ExxonMobile remains resistant. But change is coming. As the article says ’the beginning of the end is here’.

Saudi Arabia rebukes Opec partners for ‘false promises’ on output curbs. Key here as the Saudia Arabia’s energy minister says the market cannot be fooled continually. Interesting also to note the use of satellite technology to track oil tankers, exports and barrel shortage; making it easier for everyone to see what is really happening.

Opinion Ditch zombie companies and embrace entrepreneurs. A call to follow the polices of Joseph Schumpter rather than Milton Keynes. Uses the failure of British Leyland as an example how government support utilmateley failed but then the West Midland rejuvenated its self as the workers skills were recognised and applied by the likes of Nissan, Ford BMW etc.
Suggests that rather than support zombie companies the money would be better spent on skill development and retraining. It concludes by saying:
'It’s time to update and rebrand Schumpeter’s strapline: out with creative destruction, in with accelerated adaptation.'
Well worth considering.
Also read Opinion Support people rather than jobs for a resilient post-Covid future. Notes 'Supporting people rather than jobs also works better when the roles at risk are lower skilled because fewer months of training are lost when people switch to other positions. With the pandemic disproportionately hitting the lower-skilled and worse-paid retail, hospitality and travel sectors, it is increasingly workers who deserve our support more than their employers.’
Notes that is a vaccine is available soon then supporting jobs in the hope that normally returns quickly makes sense but that does not seem likely. It concludes ‘It is time, therefore, for a shift away from temporary job retention schemes. We need generous benefits for those out of work and intensive state support to help people retrain and find new roles.
Transitions are hard. But it is better to attempt the difficult path than to pretend the pre-Covid-19 economy will return if only we wait a little longer.'

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