FT Weekend weaponising US pension money - what's he want? Jimmy Lai, Swire, Reasons to be happy

17 Nov

For me though, the most important for Asian investors is Trumps’s executive order on investment into Chinese companies linked to the PLA.  The FT seems preoccupied with the short term effects; the article is tucked away on page 15.  But to me the weaponisation of US pension money is so much bigger.  It is something I have written about for months.  It is the logical next stage after weaponising the USD and the US financial system.  The real impact could be far worse than the sanctions against ZTE, if it is extended.  The withdrawal of US investment funds into Chinese companies could devastate China, just as China is trying to attract international money to help reboot its economy.  Just look at how effective the US has been in persuading countries not to use Huawei equipment; if it uses the same tactics with its allies for not allowing their pension money to invest; the impact will be devastating.

The fact that Trump is doing it now, when he has nothing to lose is the real key. He is handing Biden what could be the ultimate deterrent when dealing with China; far more potent than any military force. The ability to undermine the Chinese stock markets. To destroy every Chinese retail investors belief in the Party’s ability to protect them and there is nothing China can do to retaliate without making it worse. President Xi, I think is aware of this and hence the rush to get companies listed in HK and his hope of that the 'dual economy' would make China self sufficient. The trouble is that now China does not have time on its side.

I wrote a while ago that it made no sense to delist companies in the the US if you were going to allow US investors to buy them in Asia. Sure enough, now Trump has closed the loop hole. China actually made it worse by pulling the Ant Group IPO; revealing a new risk that most investors had not been aware of before; that of upsetting President Xi.

Currently there are only with 31 companies. But if there are concerns about US users TikTok data being shared with the Chinese Government then it is only a small step to extend the ban to Chinese internet companies. Whilst Trump only has a limited time left in power, he has opened pandora’s box and it is a tool that Biden and every future US president now has at their disposal.

The question now to consider is how will the US use this power, want does it really want to gain. More concession from China with regard to Stage 2 of the Trade deal? China had hoped that post election it would have might be in a better position; that does not seem to be the case now. Or maybe rolling back the National Security Law in Hong Kong? But the humiliation that would be for President Xi; but that might be what Trump wants; he lost the election and blames, in part, President Xi; talk about a lover scorned! The next few weeks and months are certainly going to be interesting.

I hope you enjoy the rest of your weekend.
Any comments or feedback welcome.

China Telecom drops after US moves to ban investments tied to Beijing military. Mentions that some feel that there are going to be compliance problems for global investors. It will only impact US investors and the investments they make or the funds they invest in. I have no doubt that the fear of falling foul of a US government regulation will have US compliance officers of funds and ETF providers on their toes to ensure compliance. As funds have had to comply with Mifid, then tracking specific shares will not be a problem. I am sure some already have software that can ensure compliance. There are unlikely to be many individual US retail investors with holdings as most will be holding via funds. Plus the fact that shares registers are for the most part electronic and the improvements in KYC in the past couple of years will make it easier too.

The bigger question is what will the main index compilers do? They will have to decide whether to just drop the stocks from their indexes or run two indexes; one for US investors and one for non US investors. If there were to keep them in, and not worry, then the tracking error would be too large for the US investors. So many would no longer use the benchmark; an index compilers biggest fear.
Another interesting point is how would the rest of the world react? Would they still invest in them? The Mobile Telco names were the market darlings 10 years ago as we moved into 3G but in recent years they have become more like utilities. They have to provide the infrastructure but it is the platform operators, the E-Commerce names, that are now the darlings of the market and who make the money. The mobile telco operators are hoping that 5G and IoT is going to be a boost but I think that is questionable. Monetisaing the 5G network is going to be difficult. It is more likely to be the mast operators who make money. There are the ones who will be the important interface between say the car and on the road and data it needs in the cloud.

As I wrote this morning in 'What to know before trading Asia on Monday’ it shouldn’t be assumed that Biden would reverse the order. There is currently bipartisan support for anti China measures; especially those linked to the Chinese military. As Alicia Garcia Herrero of Natexis said “If I were Biden’s adviser, I’d say: ‘Don’t touch that thing’,”

Lastly it does seem to imply that Trump will continue cause mischief in his remain days in office. The potential for more executive orders aimed against China or others that have upset him should not be underestimated.
See also LEX China/Trump: banned camp

Lunch with the FT Jimmy Lai. ‘At least we fought, we showed our dignity’
The Hong Kong tycoon used his media outlets to needle Beijing — and found himself arrested. Over dumplings and duck at his Kowloon home, the entrepreneur-turned-rebel talks to Ravi Mattu about the city’s uncertain future, backing Trump and never giving up
Key points he makes are that
'Central control has tightened under Xi Jinping, the country’s most dominant leader since Mao Zedong. Lai sees China’s relationship with the world as a clash of values. Until Beijing accepts the west’s, he argues, it will never be a reasonable actor. “The free world has only one set of institutions and those are western institutions that evolved from western civilisation,” he says.’
He wanted Trump to win because Trump was hard on China; 'Lai says. “The only way to avoid war with China is to threaten war,”'
He notes that if the protesters hadn’t turned to violence the the National Security Law might not have been enacted. But for himself 'he says, non-violence is the only way to maintain the moral high ground and would have been more astute tactically. Still, he adds, it was inevitable that Beijing would eventually take control.’
He believes '“At least we fought, we showed our dignity and that Hong Kong people aren’t just people who are money makers,” he replies. “We have a soul, we have dignity, we have pride as human beings. That’s important. We can’t have mass resistance again but we haven’t given up.”’
Looking forward he notes that 'Beijing’s squeeze on the rule of law will force many to reconsider. “The problem of doing business without the protection of the rule of law will sink in when you get in trouble with a Chinese business partner.” On that point one only has to look at the problems ARM is having with its Chinese business partner and the fact that the courts and the government will not assist; not least because he is politically connected. A stark warning that investors in China should not underestimate; another example is seen in the pulling of the Ant Group IPO reportedly on the instruction of President Xi.
On the forth coming court case '“The only thing I worry about is the family. If they use the family against me, I don’t know what I would do,”’
A sad reflection of the law in Hong Kong when the accused is worried about what the State might do to his family.
Worth a read

Swire in unfamiliar territory after Hang Seng relegation. End of an era for Hong Kong stalwart as the trading house, which was one of the indexes original constituents is removed from the index. The most recent Hang Seng Indexes review has decided to exclude Swire Pacific and replace it with Budweiser Apac, Anta Sports and Meituan Dianping. For many it was a surprise it kept its place in the last review when Alibaba was added.
What it really reflects if the change of what drives the HSI. When I started in Hong Kong as a Property analyst over 23 years ago almost every company did X or Y but had on its description ‘and Property’. Then Property and the conglomerates were slowly edged out by Telcos, then Chinese Banks and most recent the E-Commerce space.
Swire was also struggling since it spun off its Property Arm into a separate listing.
To me it reflects Hong Kong’s ability to move with the times and continue to re-invent the drivers.
For Swire the company remains committed to Hong Kong despite the pressure on it from China over its ‘loyalty’ to China. With China seeking to punish Cathay for allowing its cabin crews the freedom of expression that was their right under the handover agreement. Swire remains in my view a good company. There was a good piece written recently about whether it should sell Cathay Pac; which used the analogy of Swire being like a plane with four engines: Coca-cola bottling, Property, Marine and Cathay. With two cash cows and then Marine services and Cathay hedging each other over the oil price (although I think Cathay’s in house fuel hedging policy actual undermined the natural hedge). Whilst the hedging has failed spectacularly due to covid the vaccine is a huge light for the groups prospects. The sale this week by Swire Properties of Citriplaza I think shows it still has the potential to be part of a diverse portfolio.

TikTok owner gains reprieve on US divestment deadline. Basically Cfius has given it another 15 days, it was hoping for 30 days. The company remains in the cross hairs of the Trump administration and that is unlikely to change as was reported early in the week; ByteDance has been getting little feedback on its proposals. It has proposed restructuring TikTok US as a new entity wholly owned by Oracle, Walmart and ByteDance’s US investors. Even now it still awaits clarity of what Cfius needs to see to approve the deal. I would think it will hope to get further extensions and outlive the Trump administration and seek a deal with Biden. But there is now certainty they will get a better reception.

Editorial Market have found reasons to be cheerful. Vaccine hope challenges narrative of lower-for-longer interest rates. Looks the the implications for the yield curve from the announcement of a covid vaccine and a Biden electoral victory. Higher long term rates indicate that growth is expected and recession when they are lower is the basic premise. Recession equals loose monetary policy and growth tighter. So the move higher in the T10 indicates the potential for the return to the historic norm.
That has prompted the rotation back into the ‘reflation trade’ that was the rage pre-election when the ‘Blue Wave’ was expected although for slight different reasons. The thought being that the vaccine will accelerate the return to normalcy and improve the recovery for companies hurt by covid and the lockdowns and I guess stave off some potential bankruptcies. Beneficiaries this week were what I call the re-opening names; IAG, Airbus, the banks etc. The losers were the stay at home names; Amazon, Zoom etc.
But despite this weeks euphoria there are reason to be cautious; the logistic issues of distributing and inoculating people, especially in the context of rising covid cases prompting travel restrictions. Also the potential for rising unemployment or under employment as companies deal with higher debt burdens.
Strong growth usually leads to inflation and we saw oil rally on the news too, which implies that the era of ‘lower for longer’ may be curtailed. That will impact a whole range of companies including the tech growth names.
It notes that post 2008 we did not see much in the way of reflation for reasons it says; that have not changed. It concludes 'beating the pandemic will do little to boost productivity or undo the ageing of rich countries. Perhaps for this reason markets have pared back their gains over the past few days. Ultimately, though, investors, and the whole of the world, have more reason to be optimistic today than for many months.’

I think actually quite a lot has changed. The fact that so much monetary stimulus has been directed at individuals and businesses rather than the banks and the financial system. The fact that interest rates since 2008 have been kept at historically low levels. Powell was only raising rates so the Fed would have a cushion if there was another financial crisis, and when covid occurred he did not hesitate in taking them back down. Covid has not been a financial crisis. Covid has been a lifestyle changer and although a vaccine means we can go back to the former way of life some norms will now have changed forever. Others will return but only very slowly. Whilst much of the cash given to individuals was necessary for them to survive I think a lot of money has been saved. As people see the vaccine being effective and normality returning, sensing a security in their employment and future; then people will start spending; especially in America.

Pfizer ‘game changer’ shifts outlook for global stocks. Covid jab raises prospects for ‘value’ picks while tech sector restrains S&P 500’s growth. Suggests that fund managers will overlook the detail of how Pfizers vaccine will be distributed and whether it is an international solution. That combined with the knowledge that Biden will be the next President gives them a clearer outlook than two weeks ago.
The markets immediate reaction was to push to new highs and sell off some tech names whilst rotating into the unloved ‘value’ plays. But most caution the future is not linear. Short term there are still rising covid cases but long term players may have to eat some volatility but the future looks much better.
Read also
A sustained rotation into cyclicals will need a boost from inflation Summary quotes 'The UK’s FTSE 100 represents a “global cyclical bellwether”, given that almost three-quarters of the total revenue of the benchmark’s constituents is international, according to research firm TS Lombard. “With the vaccine signalling rotation into cyclicals, the UK market is set for outperformance,” it says.'
“Tech has such a superior growth rate, and it also has defensive qualities within a portfolio that provides diversification benefits,” observes Jim Paulsen, chief investment strategist at the Leuthold Group. “Tech will underperform, it will not crater. Over a 12 to 36 month horizon, tech looks good to me.”
Also read
Rosier picture spurs race into US junk bond funds and
Vaccines take toll on bonds but trajectory is far from certain.

On that note worth reading Can Americans learn to trust a Covid jab? Looks at a survey of who would and who would not take a covid jab if one was available today. The nations currently most sceptical being USA and France.

Person in the News. The US Senate’s Republican roadblock Mitch McConnell the majority leader in the Senate would stand firmly in the way of Biden’s more progressive plans, writes James Politi. Basically Mr Politi thinks that because Mr McConnell was so anti Obama that there is little hope any bipartisan co-operation this time either. But it is worth remembering that McConnell did compromise on a tax deal in Obama’s second term that was negotiated by Biden. Biden and McConnell know each other well and we are told that one of Biden’s strengths is his ability to achieve compromise.
Additionally whilst some of Biden’s hopes may be limited with regards to the size of the expenditure there are going to be a lot of issues on which there is bipartisan support.
We should not underestimate Biden’s skills either, he will be looking at trying to temp a Republican or two to defect. As McConnell is famous for obstruction and opposition Biden is for co-operation and compromise.
Finally we should not rule out the fact that the Democrats still have a chance at winning the two runoffs in Georgia in January. I think it is unwise to assume that Biden’s policies are going to be stymied.

Shopping malls need to travel back to the future. Looks at the history and the future for the American Mall. Notes to events this week Simon Property Group (with Brookfield Asset Management) to buy JC Penny out of bankruptcy whilst Unibail-Rodamco-Westfield in Europe was unable to get investors to support a capital raise. Thinks the key culprit is the internet and Amazon who has undermined 'physical browsing’.
It does not think the Mall is a lost cause; some in the suburbs could benefit from the move to remote working and the need for some physical interaction. But it does think they need to evolve from the current almost uniform layout. 'They must be more enticing, less uniform and smaller; they could even learn from the high streets they replaced.’
Notes the ‘classic mall’ was created by Victor Gruen seeking to create ‘a neighbourhood centre’. They were designed as centres of local communities 'with a post office, public library and doctor’s offices, as well as shops.’ Part of the problem was his designs were not elegant Galleria’s but function shapes. The current concept of ‘anchor tenants’ a food court and ‘other’ outlets will need to be rethought. The Nordstroms, JC Penny’s are no longer real anchors.
It suggests Malls should learn from Supreme in Lower Manhattan 'It built a devoted following from its skateboard origins, with fans lining up outside its 12 stores (six of them in Japan) when it has a “drop” of its new designs.’ Using 'scarcity and novelty’ with 45% of sales outside the US and 65% online. It spans physical and digital worlds.
The idea being to draw people out with shops they want to visit in preference to sitting in front of a screen.
It concludes 'The shopping centre of the future will not be Gruen’s mall — it could be more like a high street or the ornate arcade he once imagined re-creating. But when people are allowed to gather freely again, they will come'

I think that essential the article suggests the integration of what used to make High Streets successful; variety, novelty and interest. In that respect they might want to look at some of the successful Malls in Asia and Europe for ideas. My friend, Simon Smith at Savills in Hong Kong says that Malls are going to have to be more ‘Entertainment’ orientated and I think there is a lot to that. Good restaurants; not just food courts. Having specialist stores not as you find in Hong Kong the same retailers in every almost every mall.
Also it is worth noting that JD.Com this week announced that is was looking at increasing its physical stores in the lower tier cities in China as it seeks to compete with Alibaba (who has a tie up with Sunning). So whilst the Internet and Amazon may has hasten the demise of the historic mall, it maybe worth considering including an Amazon store in the new one, or close by.

Does sustainable fashion exist? Fashion marketing may be ultra-green, but the reality is very different, reports Lauren Indvik.
Whilst it is looking at the green aspect of clothing or lack of them; one if the initial graphs shows most people are wearing their clothes far less than they were before they cease to be used. So even if they are ‘greener’ in their production the reality is that they are less green in the total scheme of things. An interesting read
For investors it also means that the clothing and footwear manufactures still look like good opportunities; obviously after due diligence. Nike this week good an upgrade on the basis of faster recovery and I like Yue Yuen (551 HK)

New US Covid-19 cases accelerate at record pace. 170,333 cases Friday. Joe Biden calls for ‘urgent action’ while Donald Trump rules out a lockdown. Trump’s first press conference since the election where he touted the success of Pfizer’s vaccine and the made it clear he would not declare a nationwide lockdown. Biden called for a 'robust and immediate Federal' response.
Press reports show that basically the system nationwide is under strain. With different areas issuing directives, that are hoped to be an appropriate response to their specific needs.
See also Adviser to president-elect demands overhaul of vaccine effort. Céline Gounder, a member of Mr Biden’s advisory group, wants Operation Warp Speed stop be directed towards more testing. Which now that we have a proven covid vaccine and several others likely to follow shortly does make sense to me. Equally I would have thought more focus on tracing those who had been in contact with people who have tested positive would be good too.

Spac sponsors prosper in ‘2020 money grab’. FT analysis shows cash shell backers earn striking sums in trend attacked by Muddy Waters, while watchdog also voices concerns. Worth a read to understand why these new vehicles are coming under increased scrutiny from many different quarters. Outlines how Michael Klein reaped more than $60m from a $25,000 investment and that was only a partial sale with the remaining stake worth $400m.

FT BIG READ. CORONAVIRUS PANDEMIC Inside the hunt for a vaccine. Looks at the couple behind BioNTech, who developed the vaccine that offers humanity a route out of the pandemic. The husband and wife team behind the German company believe their technology could also transform medicine.
How is works is basically not like a normal jab. It does not give you a mild dose of the virus so your immune system can recognise and fight it. Instead it uses mRNA which is non-infectious but sends instructions to the cellular machinery within our bodies to produce our own anitbodies or drug; it also activates T-cells; one type (CD8) to scan for the virus and kill it the other (CD4) orchestrators who make sure the 'antibodies are directed against the right part of the virus and bind very strongly. They also help CD8 work, calling on many other parts of the immune system.’
It is new technology that was previous shunned by main stream practitioners. It success will mean more acceptance and adaptation for uses against other diseases.

For Interest
The imitation game. An AI model has been hailed as a big step towards the technology’s goal: an intelligence equivalent to humans. John Thornhill meets GPT-3 and reports on its potential benefits — and the threats it could pose to society
Impressive to think that Turing in 1950 was able to see that one day computers could become good at impersonating humans. An interesting read
'According to Vallor, our own understanding is not an act but a process, a lifetime struggle to make sense of the world for the individual, and a never-ending collective endeavour for society that has evolved over centuries. “We have been trying better to understand justice and better express beauty and find ever more sophisticated ways of being funny for millennia. This is a matter of going beyond competence into excellence and into forms of creativity and meaning that we have not achieved before. “That is why the holy grail for AI is not GPT-3,” she continues.
“It is a machine that can begin to develop a robust model of the world that can be built upon over time and refined and corrected through interaction with human beings. That is what we need.”'

Book reviews. One of the pleasures of the weekend is having the time to read. The other great one is to talk at leisure to people …. In my view.
Out of the shadows. When does the vital work of Britain’s spy agencies stray into snooping on the innocent? Philip Stephens looks at two books on the modern craft of spookery.
Worth a read, lets face it, everybody is interested in secrets.

Dirty money’s tangled web of deceit. Tom Burgis’ probe shines a light on the legalised secrecy within the financial system, writes Ece Temelkuran.
Another interesting read.

A mistress of her craft. A comprehensive new biography of Sylvia Plath seeks to free the poet of the cultural baggage and mythmaking of decades, writes Cordelia Jenkins.
She was married to Ted Hughes and her suicide, while her children slept upstairs was perhaps the defining detail of her life. It is sad to reflect that some of our greatest poets, who provide such pleasure, have such troubled lives.

The battle for conservatism. A panoramic study of a political tradition that came to dominate a liberal modern world. By Nick Pearce.
A lovely quote
'He writes in “comradely spirit with a question for the left: if we’re so smart, how come we’re not in charge?”’

Art world toasts Biden victory.  The Art Market | Njideka Akunyili Crosby’s Brixton painting gifted to Tate; Victoria Siddall moves to Frieze board; New York state sues Sotheby’s over tax. By Melanie Gerlis.  
A good read, especially as I hadn’t really thought about Trump’s impact on art.

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