Sept 8 FT Thoughts Trump decoupling, Softbank, SMIC, Nongfu and more


10 Sep

Sept 8 FT Thoughts   Trump decoupling,  Softbank, SMIC, Nongfu and more

MARKETs @ 1PM Hong Kong time.
JAPAN
opened higher and worked slightly higher in the morning session.  Opened a little lower in the PM from the morning close but again working higher.  Currently +0.5% Household Spending was weaker than F/cast and GDP data was mixed.Softbank -1.4% but off early lows
S KOREA  opened higher and traded sideways Kosdaq currently +0.6% and the Kospi +0.9%.
TAIWAN opened higher and again traded sideways (12,600 -700 range) currently +0.3%
CHINA opened higher but sold down with concerns over international relations with US and India. At lunch was -0.5%
HONG KONG Opened higher but sold down through the morning concerns over Trump escalating the decoupling from China; -VE E-commerce names.  At lunch -0.6%
NongFu Water +85% on its debut (slightly below the grey 91%) but eased back through the morning was +55% at lunch.
EUROPE I would expect the markets to open slightly higher following most of the Asian markets.  Data due Eurozone GDP Growth Rate, Employment Change , France and Germany balance of trade data  current account data
US Futures indicating +180pts so expect a rebound from Friday’s close. NDX will be watched closely after the revelation about Softbank’s position in the tech names. Data due NFIB Business Optimism, IBD/TIPP Economic Optimism, Consumer Credit Change


On line
Trump floats ‘decoupling’ US economy from China
. President vows to end reliance on Beijing as he raises anti-China rhetoric in re-election campaign. Here he was threatening that firms that outsourced jobs to China would be barred from US government contracts and that those that brought jobs back to the US would be rewarded. Negative for sentiment and likely to worry Chinese investors. Although the article and others have pointed out that for all of Trump’s rhetoric on China the trade deficit has changed very little and the recent change was due to covid. Furthermore that tariffs have hurt US consumers more than China and US farmers are still worse off despite the subsidies aimed to help offset the impact of the trade war.
For me the big concern is that he might further weaponise US investment money by preventing it investing in Chinese companies as he has with the Federal pension money.

South Korea struggles to lure factories home from China. Government to expand incentives in battle against slowing growth, says SME minister. The fact that it is struggling to lure to companies back to S Korea is a positive for China but the fact that its increasing its efforts is negative. Key is the wage gap and that is something that most companies are keenly aware of along with employment laws in S Korea and probably the influence of the trade unions. Interestingly the article notes the increased use of robotics and AI as a way of countering high wages. +VE for the Robotic names like Faunc, Yaskawa Electric and THK in Japan. But one of the key motived behind this move by S Korea is job creation.


Print
SoftBank’s value plummets $8.9bn as ‘whale’ options bets unnerve traders. 
Looks at Monday’s sell off in the stock following the revelation that it has build a large derivative position in US tech stocks; making it more like a hedge/trading company than an investment company. For many retail investors the mention of derivatives raises fear of losses. For institutional investors, whilst they might understand the use of derivatives the scale of the position may also raise concerns. The company was supposed to be selling assets to reduce debt, rather than build a derivatives book.
The company is trading lower again this morning but off its lows. For many the interest will come when the US markets open later today and the reaction to the revelation.

Chipmaker SMIC hit by blacklist fears. Washington looks to bar Chinese group over alleged military links. SMIC’s shares tumbled yesterday on the news. It was amazed that it was being targeted. But I would imagine that the US concern is that SMIC might supply Huawei with chips; as the company has not applied for a licence to supply Huawei but it has not declared that it will not.
The article notes that SMIC said that it only manufacturers for civilian use but a report from a US defence contractor said ' various researchers affiliated with the People’s Liberation Army were using SMIC processes and had their research devices manufactured by the company.’

US border agents target Chinese students. Airport searches of electronic devices for stolen secrets stoke anger among researchers. Another example of the collateral damage from the worsening relations between the US and China that students are being searched.
It does not mention whether any actual material had been found during the course of the searches; which rather suggests that nothing significant has been found and this is more of a play for the domestic audience in China. You would also have to be a pretty audacious spy to have any sensitive material on a phone or laptop that could so easily be searched.

China exports beat forecasts with 9.5% jump in August. Beat expectations which many think reflects that the global economy is recovering. But if you look at the detail, the headline is flattered by the increase in medical equipment which is covid related rather than a sign of the global recovery.
The data indicates that exports for major commodities were down; that’s refined products, unwrought aluminium and products, steel products, rare earths and grains.
Which seems to indicate that the recovery is only progressing slowly. That could mean extra pressure on the Chinese exporters.
Imports falling, would also suggest that companies are running down inventories; a sign that confidence in the recovery is waning. Imports MoM fell for major commodities including crude oil, iron ore, copper and soybeans although they were up YoY. Interestingly purchases from the US were +2% (no much considering theya re supposed too being buying more) but were -30% from Europe (slight -VE for Germany I would think).

Chinese water brand Nongfu Spring’s IPO more than 1,000 times subscribed. Looks at the strong demand for the stock which was +91% in the grey market and opened +85% in early trading. Driven by demand from retail investors. It's a well known brand in China and according to Frost & Sullivan has the largest market share with 20%. The increase in the retail demand triggered a clawback from institutional investors to retail. That took the retail share from 7% to 27% and hence would have created more demand from institutional players seeking to get their allocations in order to add the stock to their portfolio’s.
There are good profits in water. Once you have your source, bottling and packaging sorted. It is then a matter of where you pitch your band, the distribution and price point. After that its about volume and competition. Tibet Water (1115 HK) was a darling a couple of years ago but now has fallen significantly from its highs. KEY is that this is a very competitive business and the entry barriers to new entrants are reasonably low.
For other IPOs it shows that retail has money to invest so that is positive. The brokers still have plenty of margin finance to offer so that helps too. Means retail investors don't have to sell existing holdings in order to apply for this one.
But each IPO will be taken on its merit. Yum Brands is next up another consumer play on China. I think looking to expand post covid could be very opportune. Rents are likely to be lower. A number of the ‘mum and pop’ noodle shops may have gone out of business and the large chain with hygiene standards may be more appealing. The big one is obviously Ant Group and exposure to tech and finance in China.
I still worry that Trump may see to limit US investment money going into Chinese stocks, that would be a game changer. Until then expect the Chinese companies to raise as much money as they can. Which should mean a good year for HK Exchange (388 HK).

For Interest
US banks show mounting concern over real estate lending
. Something that I have written on before. Looks at how so-called criticised loans are rising significantly.
'Among the 10 banks with the largest increases, criticised loans rose 62 per cent in aggregate in the second quarter, but criticised commercial real estate loans rose 144 per cent, to $26bn, according to Financial Times analysis.’
The two key elements are the property valuation and the loan to value ratio. A big issue I suspect is that the valuations are pre covid. That means the if the loan ration was 50% back in January they was plenty of scope but since then things have changed significantly. Also back in January the commercial property market was a very different place. Since then many firms have gone bankrupt and alternative tenants will be hard to find. Some may be lucky but I think this is going to come back and hurt the banks. Furthermore what is true for the banks is also likely to be true for CMBS holders which will be a much group of investors.

US stock bubble on track to rank among biggest in history by Andrew Parlin founder and chief investment officer of Washington Peak, an investment advisory firm.
Compares today's tech valuations with the speculation seen in Japan back in the late 1980’s.
He notes that bubbles don’t tend to deflate evenly but burst.
'When and how this ends is impossible to say. But with the Fed pursuing thunderous asset purchases and getting ever softer on its 2 per cent inflation target, the bubble is firmly on track to be one of biggest in stock market history.’
Worth a read

Opinion The US is having a Wile E Coyote moment An analogy to when the Coyote runs off the cliff edge and is momentarily suspended in mid air before falling.
'The US may not have started falling yet, but we are no longer on terra firma. Gravity may suddenly take effect in the form of job and income losses and business failures, and it could also come from a second wave of the virus. Yet, even though Wile E Coyote always plummets, the US economy need not. Whatever the trigger, policymakers must act quickly to throw out a safety net and prevent the economy dropping deep into the recession canyon.’

Opinion Nuclear states engage in a dangerous game. Worries about the potential of a nuclear war as tensions between China and India and China and the US. As the erosion of nuclear deterrence occurs tow risks rise 'The first is of a conventional war, which could happen if two nuclear-weapons states believe they can fight each other without the risk of nuclear escalation. The second is of a nuclear war, which could happen if a conventional war escalated unexpectedly.’
Notes the fact that China has raised the risk by killing India troops is a worrying escalation.
As well as a possible confrontation between the Chinese and American navy is the South China Sea. In summary he says
'The risks of such a clash are now rising, with Washington and Beijing taking actions over Taiwan and the South China Sea that the other side regards as provocative. The obvious danger in a clash is that diplomacy fails to calm things down and the conflict escalates.
The fact that any confrontation would be seen as a symbolic struggle for primacy in the Pacific means a clear defeat might well be unacceptable to both Beijing and Washington. That increases the risk of military escalation between two states that possess considerable nuclear arsenals. No one should be complacent about how that might play out'

Bumper year for IPOs is also a harbinger of long-lasting change. Looks at the changing landscape for IPO’s post covid.
Part of the driver for change is that most US IPO’s experience a ‘pop’ on the first day. In fact todays HK listing on NongFu up 85% on the open would seem to be a prime example. That is money that could have gone to the company.
In the US the article says there have been changes to direct listings which allow companies to raise fresh capital and hence make them more attractive. There is also the growth in ‘Spacs’ using revers mergers and so giving more certainty to listings.
For IPO’s lock ups are also being reviewed.
An interesting article as it says 'Many bankers believe that no matter when the world goes back to normal, IPO marketing will carry on, at least partially, with video conferencing. But that will not be the only change to the process that will endure from 2020.'

FT BIG READ. THE MOBILE ECONOMY. Why app inflation is bad for consumers
Higher ratings are the ‘lifeblood’ of Apple’s $500bn smartphone app business and since 2017 they have improved significantly. But is this a sign of greater quality, or are we being manipulated?
An interesting read but effectively its saying that the rating system is no longer a true reflection of peoples honest opinions about the apps or services.

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