Sept 25 FT Thoughts HK activism, China camps, Hedge Funds to SQ, The next crisis, Soc Gen and more
Hope its useful and enjoy the weekend
MARKETs At 1:30pm
JAPAN opened higher and has basically traded sideways. Currently +0.6%
S KOREA Kosdaq opened higher but sold down to 800 level before rebounding and then trading sideways currently +1.1%
Kospi followed a similar pattern, sold down to 2,275 before rebounding currently +0.5%.
TAIWAN opened higher trended lower for most to the session with support at 12,150 before seeing a small bounce; currently -0.2%
CHINA opened higher and traded sideways for the first hour, spiked to 4,600 but then sold down into lunch 4,565. Currently +0.1%
HONG KONG Opened +114pts @ 23,426 vs +21pts ADR’s @ 23,332 as shorts squeezed and traded up to test 23,500 but failed to break out and sold down to 23,250 going into lunch. PM opened flat but I think likely trend lower ahead of the weekend, China Industrial Profits number out Sunday and the Golden Week holiday starting mid next week.
EUROPE Expect market to open flat with covid concerns still overhanging the market. UK Consumer Confidence Sept -25 vs -27 Aug (F/cast was -27) so slight +VE. Other data due today
EUROZONE Loans to households and Companies and M3 Money Supply European Council Special MeetingFRANCE Unemployment Benefit Claims and JobseekersUK Public Sector Net Borrowing, Car Production
US Futures opened +70pts and initially rose to +110pts , S&P +0.5% and NDX +0.6% but I would expect a flat open with caution ahead of the weekend.
Data due today Durable Goods Data, Baker Hughes Total Rig Count.
Front page lead. High-profile activist held On the front page Joshua Wong being arrested again. Also read High-profile Hong Kong activist arrested inside which looks at the background in more detail. The continued re-arresting of Joshua Wong is going to keep the protests and the new security in focus. It does note that the new National Security Law is not supposed to be retrospective but since its imposition the police have stepped up arrests of pro-democracy figures. Many think that the clamp down will be negative for potential business investments into Hong Kong. I tend to agree and re-arrests mean that it stays in the media focus.
Hedge fund Marshall Wace to open office in Singapore. Another firm that is ensuring that it has a plan B in case things go bad in Hong Kong. The article notes that applications for fund management licences in Singapore were up over 10% YoY. Which considering the general business climate; is a lot. Other firms mentioned as following Marshall Wace were; Myriad Asset Management, Nine Masts and Pinpoint
Japanese bank says it miscounted investor votes at 1,000 companies The admission has raised concerns from fund managers. It has also highlighted another area of Japanese business that will need to be updated. Physical vote counting is an area that has been prone to miscounts historically and fund managers will be pushing for a switch to digital casting. The Toshiba AGM was contentious to start with and news of vote miscounting has drawn more concerns. It will be interesting to see how the investigation goes and whether are implications of Nobiaki Kurumatani.
Read also Opinion Japan’s archaic shareholder voting system needs reform by David Baran co-founder and co-chief executive of Symphony Financial Partners which looks at the process in more detail.
Uighur camps expanding, says report. China claims inmates have ‘graduated’, but think-tank alleges evidence of growth.
Looks at the findings of a new report from the Australian Strategic Policy Institute, using satellite video evidence, that China is actually expanding the ‘re-education’ camps. Running contrary to assurances that said inmates had all graduated. It is on the basis of construction at 61 of the camps between July 2019 -July 2020. The report says that Xinjiang officials have been making misleading statements.
It has ranked the camps; tiers 1 & 2 are thought to be geared to rehabilitation whilst 3 & 4 are prisons. It also comments that facilities built this year were high security.
It is obviously an issue that is going to be kept in the spotlight and it is also likely to mean that relations between China and Australia remain frosty. It was interesting to note that two Australian academics were banned from China yesterday for being anti China.
For investors the situation raises the risks of more sanctions if more Countries decide to make an issues of human rights in China.
Mineral water magnate tops Ma as China’s richest person. Following the IPO of Nongfu Water its founder has, on paper become China’s richest person. Although when Ant lists Jack Ma regain his title. It also makes the point that Nongfu is trading at a very rich valuation and therefore continued good performance will be needed to keep it at the current levels.
LEX HK IPOs: joy shredder. Looks at how a recent IPO debut of Joy Spreader Interactive Tech closed down 6.3% on Wednesday despite strong retail support and cornerstone investors. Suggests that the appetite for Chinese companies doing secondary listings from the US may be waning and concerns about overheating rising. All this just before Ant financial come to the market. I think it was just unlucky on the debut day. Whilst interest rates remain around zero retail investors will continue to play the IPO’s. Ant will be interesting because there will be no cornerstone investors and a Shanghai listing too. But I suspect investors having seen what Alibaba has become will be very keen on the issue.
Key really is that investors will look past the first few days and look to the longer term prospects.
Fair play Developers form coalition to fight Apple over App Store practices. More problems for Apple as App developers band together forming The Coalition for App Fairness; aiming at: fair policies, urgent oversight of the App Store, and regulatory changes that would give consumers more choice. Citing ‘excessive’ fees and ‘rules that give Apples apps an unfair advantage’ over the competition. Companies involved so far include: Spotify, Epic Games, Blix, Tile, Match Group, Basecamp, SkyDemon, News Media Europe and Prepear. The coalition is being run by Sarah Maxwell, 'who has held roles in public relations and policy at Uber, Block-chain.com and the White House.’
Whilst at present the number of companies involved is tiny relative to the total number of App developers it shows there is concern over the issues and it is likely I would think that more join over time.
Apple has sought to monetise its infrastructure via the App Store and if it is forced to change that it will no doubt look to monetise the operation via something else; the question for the market is now where and what will be the impact.
Notable that at this stage Microsoft and Facebook are not part of the coalition. It will also be interesting to see whether the government gets more involved too.
New US jobless claims climb as pace of recovery stalls. Looks at the latest US numbers which disappointed the markets and suggest that the US economy is struggling to maintain the earlier momentum. Part of that could be the lack a new stimulus plan from Government but it could also be that a lot of the SME’s who are responsible for a lot of job creation are struggling to get back on their feet.
This was why Powell was asking that they get direct assistance and not just loans. These small businesses don’t have the scope to repay debt at this stage. If they don’t get support then I think the recovery is going to be a lot more drawn out and fraught.
Opinion The next financial crisis may be on its way by Gillian Tett. Oxford Economics survey shows that 20% of people think the next crisis will occur in the next two years. That impacts things like Business Sentiment surveys.
Two things could mitigate the risk; central banks saying they will do whatever it takes. Plus banks are not the source of the current crisis and most are in good condition.
But the problem could be that a financial crisis doesn’t always materialise in the same way; in fact in my view, they rarely do.
A worry for Carmen Reinhart, chief economist of the World Bank is the high leverage that many institutions were operating under before the current crisis. Add to that liabilities that are currently hidden under bank forbearance and there could be a lot more trouble down the road. Many banks, especially in the US have increased reserves ‘just in case’ but places like India, Italy and other may be less prepared. Low interest rates are not helping banks either.
Another issue is that this is not a boom to bust crisis, we do not have a template for this crisis.
We are already seeing the ‘fear of future problems’ with banks growing more cautious about lending, despite the central bank policies.
'“Surveys [already] show a significant tightening of lending standards,” said Mr Shin. Or as Ms Reinhart notes: “A credit crunch seems very likely.” No wonder Oxford found that fears about finance were poisoning confidence; or that the chance of a V-shaped economic recovery seems increasingly low.’
I think the crisis could come soon as more SME’s fail and that creates a domino effect. They are the real job creators and that is why Powell is saying they need direct help. In part because the banks are tightening lending but also because many will not take loans because they cannot see how they are going to be able to afford to repay them with business so poor. That’s all before anyone even talks about inflation and the potential for interest rates to rise.
Good news will have some bad implications for Big Tech stocks by Sophie Huynh a cross-asset strategist at Société Générale CIB
Basically saying that when we get a vaccine and normality returns there will be a rotation out of big tech into cyclicals. Big tech will still perform but be marred by the rotation. It is also likely that Big Tech will be subject to more taxes and regulation again hampering performance. In the meantime they don’t think big tech will collapse under its own weight.
For investors the question will be which cyclicals to rotate into; good balance sheets and sound businesses remain key.
SocGen’s engineering skills return to the fore. French bank treads tightrope between cutting risk and staying true to its identity with structured products shake-up. An interesting read, covering the background of how Soc Gen got the be the leader in options and derivative’s and how it came to fall from that position too.
Looks at how it is now trying to rebuild its position in what has now become a much more competitive market place. Interestingly it is looking at 'It’s innovation that goes towards creating products that are easier to manage for us and that are still very profitable for the customers,”’
The balance Mr Oudea has to find is between 'Retreat too far and he will be accused of squandering a traditional strength. But ramp up too much and SocGen will be seen as courting danger.
As one equity derivatives expert put it, “when you make too much money out of products like these, it’s not because you are cleverer than others, it’s because you don’t see the risk”.’
It will be interesting to watch; the bank has excellent skills in the derivatives field, from my experience though their historic focus on that means that they have limited and in some ways, alienated themselves, from more traditional incomes stream of related or straight trading equity income. Hopefully going forward they will focus on the derivatives that they are good at but not forget the wider equity trading platform. Although the more vanilla equity trading is less profitable, especially when you have good derivative products, there are times when derivatives fail and the ordinary ‘bread and butter’ equity trading proves its worth.
Read also Trend-following hedge funds struggle in year of volatility. Strategy that proved its worth during 2008 financial crisis is now having mixed fortunes.
Looks at how some commodity-trading advisers (CTA’s) have done better than others and in general terms finds that those who kept to their core strengths did better. But key seems to be sticking to the core theme of the fund and refining the inputs rather than incorporating new strategies.
Most importantly I think shows that there is no one strategy or approach that is always going to produce good results. If there was, were would all be using it and life would be simple. Which it the same point I made about Soc Gen; derivatives did very well for a while and have seem moments of renaissance but they are not the holy grail; diversity and the ability to transition seem the be key.
Buyout groups deal blow to creditors by abolishing seats at takeover tables. Looks at how creditors are being forced to give up their right to be paid back when a company is sold. Another example of how low interest rates are distorting the markets. Previously creditors would be repaid and then had the chance/choice to fund the new owners but with the ability to change the loan terms. Now deal terms allow for debts to be sold with the company 'lock stock and barrel'. Means that lenders will not get their money back and could be subject to more risk after the sale. Buyers like it because they get the assurance that funding is in place and they have less parties to deal with in the M&A process.
'In one example, broadband company Radiate Holdco — which is owned by the private equity group TPG — raised $2.7bn last week in a refinancing deal that increased leverage, funded a payment to TPG and slid portability language into the loan documents. A person with knowledge of the deal said TPG was seeking to make the company more attractive to potential buyers.’
For me I worry that the easing of protection for lenders by ‘clever financial engineering’ is increasing risks. As ever the Private equity companies are taking their money out where they can and leaving companies saddled with more debt. I think that if they are going to do this sort of financial engineering; there should be clauses that makes the payments taken out early by the private equity funds repayable and with penalties if the company subsequently fails due to excessive debts being placed upon it. Worth remembering that these additional debts are being taken on when we are operating with zero interest rates. What happens when inflation returns and rates go up? Suddenly these companies will find that they can’t make enough money to service their debt.