Nov 11 FT Thoughts Lots on China, HK colonisation, Australia, Tech, Cathay and more


14 Nov

Nov 11 FT Thoughts Lots on China, HK colonisation, Australia, Tech, Cathay and more

MARKETs at 2:30pm
JAPAN 
Nikkei opened higher and worked higher through the day with a small dip going into the close +1.8% @ 25,352.
Topix opened higher too but traded effectively sideways through the day to close +1.7% @ 1,729
Data out at 2pm Machine Tool Orders Oct -5.9% vs -15% Sept (F/cast was -20%)
S KOREA Pre market Unemployment Rate Oct +3.9% vs +3.9% Sept (F/cast was 3.8%)
Kospi opened higher and worked higher through the day to currently +1.3% @ 2,485
Kosdaq opened flat and sold down to 830 level before finding support, then rebounded to flat but eased back to 838 level and traded sideways, currently -0.2% @ 839
TAIWAN opened lower but worked higher through the day to closed at the day high +1.4% @ 13,262
CHINA CSI 300 opened lower but traded higher to flat initially before selling down to 4,925 and then rebounding into lunch. PM saw the market sell down again currently -0.7% @ 4,920
HONG KONG Pre market opened @ 26,226 -73pts vs +78pts ADR’s at 26,379 E-commerce names weak again; Alibaba -7.4% and Tencent -5.7%, Meituan -6%. Market then rallied to the day high 26,432 before selling down to flat and then dipping to 26,250 and trading sideways. PM opened higher and trading slight uptrend currently +0.3% @ 26,375. At lunchtime E-commerce still weak. But Telcos and Infrastructure Strong.
EUROPE Expect markets to open lower with Tech names still weak. No data due today but several ECB speeches. London’s FTSE is seen opening 9 points lower at 6,294, Germany’s DAX down 51 points at 13,151, France’s CAC 40 down 24 points at 5,413 and Italy’s FTSE MIB 4 points lower at 20,776, according to IG.
US Futures opened Dow +40pts and has inched higher in Asian time currently +92pts with S&P and HNDX positive too. Veterans days so bond market closed.
Data MBA 30 yr Mortgage Rate and Mortgage Applications. Veterans Day Bond Market Closed.
Earnings Include : Air Products, DouYu, Lemonade, Reynolds Consumer, Vroom, Fossil

China’s ‘recolonisation’ of Hong Kong could soon be complete. For Beijing it makes sense to crush the things that former colonists think made the city successful. Notes that China has no intention of honouring the handover agreement and that indicates the the attitude of how China sees itself and intends to be seen by the international community.
It notes that the UK had provided Hong Kong the framework to succeed it quotes Chris Patten 'Britain provided the scaffolding — clean government, the rule of law and freedom of speech — that enabled the people of Hong Kong, most of them refugees from China, to ascend.’ It is those same things that Beijing blames for the past 18 months of turmoil in Hong Kong. The freedom of speech is a key area with the press now under threat from the new security law with its broad and undefined terms; outlawing “incitement” of crimes including the barely-defined “collusion with foreign forces”. The requirement of the education system to 'instil “love of the motherland” in young hearts. Politicisation of the relatively independent courts has begun, as Beijing and its agents pursue enemies and “unreliable” judges are sidelined.’
The delay in local election at Beijing behest and the public argument about the “separation of powers” between the judicial, executive and legislative branches of government, which Beijing says does not exist in the city. A nice quote from a 'member of the Chinese rubber-stamp parliament put it: “You can still go on dancing, you can still go horseracing, you can innovate, you can trade . . . but just stay away from [politics].”’
Pulling the Ant IPO was another example of how things had changed and will no doubt raise some doubts over the stock markets in both China and Hong Kong; political risk became a whole lot more important as a consideration.
President Xi believes he is engaged in an ideological struggle with what he views as the “extremely malicious”, “western” ideas of liberalism and democracy. Hence the move to remove the things that made Hong Kong so successful pre the handover.
Whist this is taking place Hong Kong remains dominated by British trained administrators, foreign banks still dominate the capital flows and one of the biggest landlords is Jardine Matheson. That is something that Beijing wants to change in order for it protect its 'brand of ethno-nationalist authoritarianism.’ It notes the new law was enacted after protestors set fire to a Chinese flag outside its UK embassy; which Beijing called an abdominal act of secession and treason. The new law also covers crimes committed world wide and China has called on the UK Government to bring the perpetrators to justice. That is the way China believes it should be viewed. With every other nation subservient to its laws. It wants to be recognised in the same way as the US is; the US often imposes its laws on other countries without reciprocity. China wants that too.
I also think that President Xi is still worried about the fact that there is growing resentment of the Party’s control within China. He has purged the cadres and their families for conspicuous consumption and elitism but that doesn’t mean it’s gone away. It just much lower profile. He worries that despite control of the media some western ideas are gaining interest from ordinary people in China. He is worried that having made grand statements about China’s rise on the world stage that not delivering them will cause problems at home. China is going through some radical changes due to tech. The pulling of the Ant IPO is an illustration of how the government fears disruptors and that is not changing under the current leadership. The problem is that the command leadership system under President Xi cannot innovate and hence development will be stifled. Whilst the people in China allow the government to know a lot about them in terms of personal data and monitoring it doesn’t mean they like it. They accept it because there is no alternative. If the public get the hint or idea that there are alternatives then the Party will be in trouble. Hong Kong was suggesting that there was an alternative and hence had to be changed.

Chinese tensions put Australian businesses under pressure. Canberra’s political fight in wake of Covid-19 pandemic highlights cost of angering Beijing. Another illustration of how China views itself. Australia’s request for an open International investigation into the source of covid 19 upset China and it has decided to punish the country. I think it shows that China wants the benefits of being a world leader without the responsibilities that accompany it.
The article looks at how firms in Australia are having to find new markets; one Sydney based start up is backed by a Chinese port owner who was looking to increase exports to China but is now being forced to look to other markets. China has increased restrictions but without providing details of what those changes are. As the article notes it is ironic that the increase in trade tensions comes as the China International Import Expo in Shanghai got underway.
I think that whilst Beijing views this as very much a targeted campaign against Australia many more countries will again be assessing the political risk in doing business with China. It is also interesting to see that the one product that China needs from Australia; Iron Ore, has not been affected. I would have thought that the Australian government should be considering using that leverage to try and get China to act in a reasonable fashion.

China draws up first antitrust rules to curb power of tech companies. Draft legislation marks latest wing-clipping of digital platforms after halted Ant IPO. It will define what China considers anti-competitive behaviour and marks a significant change from the previous ‘hands off’ stance. The E commerce names have been able to build their businesses within China free from foreign competitors and largely able to impose their own rules 'like users being prevented from using WeChat Pay to purchase products in Alibaba’s Taobao online store, for instance, or easily sharing links to Taobao goods within WeChat.’ Also it will stop the platform operators forcing sellers to sell exclusively on one channel. The public feed back period is until November 30 and I am certain a lot more areas will be looked at in detail.
Still I think the is mostly driven, not from wanting to give consumers more choice but to ensure companies do not have a dominance in society that rivals the Party’s. They are aware that a commercial interest could easily be used for political ends.

Bank of Japan offers to reward regional banks for mergers or cost-cuts. New scheme marks rare use of interest rate policy to reshape financial sector. The BoJ will exempt regional banks from negative rates if they agree to mergers or cost cutting measures in a highly unusual use of monetary policy to reshape the financial sector. The opportunity of earning an extra 0.1% interest on deposits at the BoJ should be an attractive incentive; should the scheme get government approval. It highlights the precarious position of a lot of regional banks and the well known need for consolidation. But at the same time the regulators have been putting up opposition to merges where it results in almost monopoly situations as seen in the recent merger to created the Juhachi-Shinwa Bank. Mergers are always going lead to less competition in the short term but over time the merged regional banks should be better placed to compete with each other.

EU hits Amazon with competition charges on handling of sellers’ data. The EU is of the opinion that Amazon breached competition rules by using non-public data that it gathers on sales on its website to boost its own-label products and services. It is also investigating whether Amazon gave preferential treatment on its site to its own products and for sellers who paid extra for Amazon’s logistics and delivery services. Coming at a time when investors now have reason to rotate out the dominant tech stocks thanks to positive news about a vaccine this is likely to add to Amazon’s woes and likely to add weight to the investigations being undertaken in the US.

IEA hopes for US renewables boost Looks at the expectation that solar and wind generation in the US could double in the next 5 years if president elect Biden delivers on his green promises and is able to get them passed into law. Another +VE for the renewables sector with companies in both the wind and solar sector likely to see gains.

Brazil health watchdog halts trials of China-made treatment. It appears from the report that the trial halt is on political grounds not medical ones. A trial participant did dies but it is said to be from an external cause with no relation to the drug. It is also a set back for China in its ambition of having one of its vaccines tested outside China and accredited; -VE for CoronaVac

Cathay Pacific brings Swire grief but ditching it would not be easy. Looks at how historically Cathay Pac was important to Swire. Uses the analogy of Swire being an aircraft with four engines; a property division, the Coca-cola bottling business, its maritime services and Cathay. The last two were natural hedges with maritime services doing well when oil prices where high but hurting Cathay and when oil prices were low Cathay did better (it does ignore the impact of Cathay’s oil hedging policy). So historically shareholders benefitted in knowing that three of the four engines would be working well. Covid 19 unset that premise as was further hurt by the civil unrest in Hong Kong. So the question is whether Swire should divest itself of Cathay. Shareholders can already decide to buy Swire Property if they don’t like the outlook for the whole group?
The article set out that one reason for hanging on is that ’this too shall pass’; unrest in Hong Kong has subsided and there is now a potential game changing vaccine which triggered a 14% rise for Swire on Tuesday and the stock is trading higher today. But it notes that not everyone agrees with that and cites 'Russell Barling, an independent transport industry analyst in Vancouver, notes that the aviation industry wasn’t what it used to be. “Very few airlines are profitable and the business model does not survive economic shocks,”’ It also notes the political problems that Cathay has caused Swire with regard to the democratic movement.
It notes that Cathay has personal attachment to the Swire family. For investors though the hope will be that it will be a business decision.
I think a key issue is whether Air China, the obvious buyer would want to increase its stake at this time. Failing their interest it is difficult to see another buyer in the market at this time.

FT BIG READ. CHINESE BUSINESS AND FINANCE. China’s risky pillars of growth With Beijing concerned that an overheated property market could weigh on the country’s post-pandemic rebound, heavily indebted developers like Evergrande are beginning to face intense scrutiny. Property remains a key driver to the Chinese economy but the government is worried about the amount of debt the sector has built up and the fact that it is increasingly in more speculative areas outside the top tier cities. An interesting read, Evergrande is the most worrying case but it is not alone as the article points out property is also a key source of revenue for the municipalities and that the current restrictions that the government is trying to impose on the sector run country to the way the developers currently operate.

Funds act to allow retail punters a way of cashing out after halted Ant IPO. Looks at the five mutual funds that launched on the basis of exclusive access to Ant shares and how they face an investor backlash as retail investors want their money back. Retail investors were subject to an 18 month lock-up. Now with no Ant shares and further losses in other tech names retail investors are understandably upset. Key is that at the moment the frustration is focused on the funds and not the government for pulling the IPO. The funds are looking at changes to their structures to allow investors to get their money out but they are not offering full refunds and many say the process is complicated and costly. Looking forward I would think that Chinese funds are once again going have more problems persuading retail investors to sign up which is a slight negative for the development of China’s financial sector.

South Korean financial groups line up offerings amid soaring share prices. Looks at how a number of S Korean financial companies are looking to raise money in the coming months and years; partly driven by the recent rally in the market and partly in orders to meet tough new regulations. It will be interesting to see how much interest they manage to secure considering some of the recent listings and the possibly changing outlook, not least due to the concerns after the Big Hit Entertainment listing.

Vaccine breakthrough leads to move out of government debt. Investors revisit assumptions about tech stock valuations and corporate borrowing costs. Notes the Pfizer covid vaccine news could be a game changer. The knee jerk reaction seems to be to revisit the reflation story that was in favour pre US election and then reversed as the election results showed no 'blue wave’. It also notes that ‘value’ stocks seeing interest; coming after months of stories about value investing being dead. It also cautions that we may be reading too much into the Pfizer news, there are issues with getting the drug into circulation although there are encouraging indicators from other drug manufacturers too. Key with all the hype is to look for good companies, selling good products with solid balance sheets.

Opinion Even with a vaccine, rapid Covid tests will be crucial. Makes the point that we don’t know if the covid vaccine will stop the spread of covid (or the mutations of it) and the fact that getting the Pfizer drug into circulation also faces challenges because it has to be stored at minus 80 degrees celsius. So testing will remain important, PCR tests are the gold standard but are not real time and require specialists. So key may be lateral-flow, or rapid-antigen, tests, which work similarly to home pregnancy tests. I would think that investors ought to be looking to invest in the makers of such test which are likely to be a part of our lives for some time to come.

Reckitt boss faces challenge of how to deploy hygiene boom windfall. Narasimhan must tackle rising competition, a shaky OTC drug unit and China baby formula issues. A timely look at a company that has done very well during the pandemic. It raises the question of whether that recent success has covered up some fundamental issues that still need to be resolved.
For investors it is a timely reminder that we need to review companies on the basis of what lies ahead and in many cases to look through the last 6 months of earnings and instead look froward to consider what is probable. Also see Lex US homebuilders: Horton econometrics. Looks at how the US homebuilders saw a significant pull back on the vaccine news and the prospect for higher interest rates. But the results from DR Horton yesterday suggest it is too early to call time on the sector. The company has a lower debt to capital ratio than its competitors and so as with all investments investors need to look closely at the detail. See also Lex Tech stocks: tails they win, too shows that some tech names are improving their businesses although I think the risk of regulatory changes could dampen the outlook.

SoftBank joins e-scooter race with Tier Mobility deal. It has made an investment in a company that has pioneered a novel model of swappable batteries and local charging. Key though is that the company is looking at new forms of transport to try and ease the problems of congestion and parking; not just emissions. For Softbank I still the company is likely to be under more pressure as the covid vaccine means that a number of companies that it has invested in and have rallied recently come under pressure.

Businesses with more women at the top have stronger shares by Sharon Bell an equity strategist at GoldmanSachs. Outlines the finding from a recent Goldman’s report. An interesting read which suggests we need to find ways to get more women into the top positions.
Summary 'Having a greater proportion of women in senior positions is not just a diversity score to target or a box to be ticked, but is associated with a lower cost of equity, stronger share price performance and lower volatility of shares, too; good news for corporations, investors and for society.'

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