Nov 13 FT Thoughts HK crackdown, Upbeat Central Banks, Tech outlook, Tencent and Market updates

16 Nov

MARKETs as at 2:30pm
JAPAN opened lower and sold down to the day low just before lunch, 25,215. PM has seen the market regain some lost ground but investors remain cautious ahead of the weekend. Closed -135pts (-0.5%) @ 25,385
Topix again opened lower traded down into lunch. PM opened at the day low 1,693 and has worked slightly higher currently -23pts (-1.3%) @ 1,703
S KOREA Kospi opened lower rallied, fell back and then worked higher and into the green but seeing resistance at 2,490 currently +19pts (+0.8%) @ 2,494.
Kosdaq similar pattern but has not managed to break back into the green with resistance at Thursday’s closing level currently -1pt (-0.1%) @ 839
TAIWAN opened flat, sold down and then worked higher into the green, seeing resistance at 13,255 currently +52pts (+0.4%) @ 13,273. Good FT article on the tech sectors and highlights TSMC’s importance.
CHINA CSI 300 opened lower with the threat of more sanctions from the US, the UK and potentially more countries over Hong Kong. Plus Trump barring US investors from China Telecom, Mobile, Hikvision and potential more ahead. Plus rising covid cases casting doubt over the global recovery. Sold down to 4,832 in the morning and then a small rebound in the PM. PM opened lower and trending lower Currentlyjust off the day low -60pts (-1.2%) @ 4,849. Expect caution into the close ahead of data due on the open Monday but Team China could try and push it higher.
Shanghai Comp -35pts (-1%) @ 3,303. Seeing a rally into the close.
Shenzhen Comp sold down rebounded to flat but sold down in PM but now rebounding currently -72pts (-0.5%) @ 13,719
ChiNext -11pts (-0.4%) @ 2,689
On Monday we get house Price Index, Fixed Assert Investment, Industrial Production, Retail Sales and Unemployment
HONG KONG Opened @ 26,114 -54pts vs -242pts ADR’s @ 25,927 with Telco’s weak on the Trump executive order to deter US investment in them. Tencent +VE after results E-commerce rallying. Chinese Financials weak. Market sold down to day low (25,909) before rallying back to the opening level but sold down into lunch. PM opened higher but trading sideways as China rallies into the close -75pts (-0.3%) @ 26,095. I expect more weakness into the close on concerns about more sanctions ahead.
After market we get GDP growth rate
EUROPE Expect markets to open lower with Asia trading lower. Rising covid cases also a concern with and the threat of increased sanctions on China also hurting sentiment.
Data due
EUROZONE GDP Growth Rate, Balance of Trade, Employment Change
GERMANY Wholesale Prices
FRANCE Inflation Rate
UK No data due BoE Bailey speaks
US Futures opened flat +24pts S&P and NDX also slightly higher but trending lower concerns over covid continue. Good after market results from Cisco and Disney but wider markets seeing weakness.
Data PPI, Core PPI, Michigan Prelim Data (Current Conditions, Inflation Expectations, 5 year Inflation Expectations, Consumer Sentiment, Consumer Expectations) EIA Gas Stock Report, Baker Hughes Total Oil Rig Report.
Earnings include Manchester United, Draftkings, Vipshop

Editorial A creeping crackdown is under way in Hong Kong. Ousting elected lawmakers undermines key principles of democracy. The fact that the lawmakers were ousted without having any means of court appeal shows that Beijing has abandoned the ‘one country two systems’ agreement that it signed. Democracy has been removed by the National People’s Congress Standing Committee. There have been other worrying actions too like the targeting of teachers, arrest of journalists and even the removal of judges deemed too lenient on pro-democracy participants. The Chinese authorities have also denied that there is a separation of power in Hong Kong; raising the question of musical independence. The editorial suggests 'Beijing’s heavy-handed approach suggests insecurity that demonstrations in Hong Kong could spread to the mainland.' (nice choice of the insecurity word). Also that China’s model is the only alternative to the west’s flawed democracy. It doesn’t know if the timing was designed to coincide with the US elections and the new waves of covid. But notes that it is vital the the West does hold Beijing to account for 'trampling on commitments to preserve Hong Kong’s freedoms after the handover from British rule.’
Notes the UK has a responsibility too and worth noting overnight the UK called in the Chinese ambassador over the matter and threaten sanctions. The US could add sanctions and has indicated that is likely too.
It calls on businesses to be ready to speak out too, about the democratic safeguards that attracted them to Hong Kong as a bridge to China. It notes that 'Joshua Wong, a democracy activist, last year called Hong Kong the “new Berlin in a new cold war”. The city was then akin to democratic West Berlin. Over the past year, China has turned it into something closer to East Berlin.
Whilst I agree with much of the sentiment of the Editorial I think asking businesses to speak out is unreasonable. The handover agreement was not a business agreement but an international agreement. It is the responsibility of the international community to call China to account. It was notable that Biden said he would hold China accountable to its pledges in the presidential debates it will be important that he does. But it is equally important that if China wants to be recognised and respected as a world leader that it also accepts the current world order rather than demand the rest of the world reordering to China’s whim. China is part of the world not the world part of China.

Central bank chiefs upbeat over vaccine boost to global economy. Powell cheers ‘welcome news’, Lagarde points to Biden win, Bailey cautiously optimistic. But still they are calling on governments to provide more fiscal stimulus to bridge the gap between now and when the vaccine is available and effective. The next few months could be challenging said Powell. Lagarde though mentioned the evidence from Denmark that the virus could transfer from animals back to humans which might mean vaccines were less effective.
Another key point was that post pandemic there was likely to be more automation and technology which was likely to impact lower paid workers in the services sectors.
That is going to be +VE for Fanuc and others in the robotics sectors. Governments are likely to also have to spend more on retraining low paid workers.

Republican frustration starts to show as Trump faces calls to concede defeat. At last the party is starting to act responsibly and acknowledging that there isn’t evidence of the wide spread fraud that Trump says took place. They must be aware that the delay is going to impact the smooth transition of power and that if there are hiccups they will be solely responsible; some thing that could hurt them in the Senate run offs. The fact that Biden is not yet receiving daily intelligence briefings whilst foreign Heads of State are phoning Biden to congratulate him and discuss policy should be enough of an embarrassment to the Republican leaders to make them act.
See also Trump machinations show he is not done with America yet. Notes three reasons why top Republican’s may be being complicit. Psychological, the keep their supports riled up for the Georgia run offs and to suppress minorities. But makes the point that by doing so they not serving America.

Biden backs Japan in islands dispute In a call to PM Suga Biden pledges that the security agreement currently in place applies to the Senkaku Islands. This will put the Chinese on notice that there is likely to be a more forthright defence against China’s recently assertiveness over the disputed Chinese claims in the region. A move that is likely evoke a reaction from China, which if it comes before January 20 when the handover of power is complete could be very dangerous as Trump could over react and escalate matters. For Japan though it is likely to give the reassurance that for the next four years they will be dealing with the America they knew before.

Apple chips away at a new strategy for computing dominance.
A must read article.
Looks at the claims by Apple that its new M1 Chip can handle 20 hours of video playback on a single change. It highlights the new battleground for tech companies as they customise their chips to handle important applications. Previously computer design was largely a horizontal structure. It is now becoming vertical because of big data, AI and IoT with the need to boost performance AND reduce power consumption; what was once key is now crucial. So customised chips give a competitive edge as they are tailored to whatever is most important to their specific use; for example Tesla wants a chip the will work with its AI so the car can be autonomous using just the car’s cameras. Amazon, Google, Facebook are working on chips that fulfil specific tasks that are important to the respective companies. Chinese companies are doing the same and Alibaba showed off its AI chip last year to be used in new equipment used by the IoT and based on open-sourced Risc-V architecture. The use of open source technology will protect them in part to the threat of US sanctions.
Along with this is the vertical shift to specialist chip manufacturers with Taiwan Semiconductor Manufacturing Company (TSMC) as probably the world leader. It makes Apple’s M1 using manufacturing processes that are more advanced than Intel can match. It is this technology that China is keen to amass but it will take it years to get up even the first couple of rungs. Think, if Intel can’t keep up what chance do Chinese companies have that are being denied access to US tech. The article goes on to highlight that the specialisation means that there are also a lot of other processes that are part of the process; packaging, assembly and testing etc. Meaning there are niches available for smaller companies. It mentions Marvell and Qualcomm but there are a lot of others too. The article concludes 'How far companies like these will eventually go in competing head-on with established chipmakers is unclear. But to judge from Apple’s claimed breakthrough this week, a deeper understanding of silicon has become an important differentiator.’ That is certainly true.
For investors I think it highlights the value of TSMC as a leader and one that continues to innovate and therefore should be a pick. Then looking at the other process for leaders. Lastly it underlines why the rest of the world should recognise Taiwan and defend its sovereignty from Chinese aggression.

Tencent plays down threat from regulators. Martin Lau at the results presentation played down the threat saying '“As technology companies become bigger and more important to the economy . . . more regulations reflect the new reality,” he said. “We thrive on competition.”’
It results beat helped by its successful online games and it is worth noting that Tencent operates a platform for other users and usually takes a small stake in them as its business model rather than becoming a dominant player itself. However its mobile and online payments business will be affected but it thinks less than Ant’s because its loans are via affiliate WeBank.
No mention of the recent stake sales by Martin Lau, but I can’t help wondering if he was aware that new regulations were coming when he made the disposals; they weren’t top of the market but...

Opinion Investors should heed the inflation chatter. Worth a read that whilst no one is expecting runaway inflation in the short term many in the market are talking about the prospect of inflation risks and investors would be wide to pay some attention. They include Goldmans and Wilbur Ross. Many investors are already re-positioning their portfolios to reflect the prospect of a vaccine in the next 6 months they would be wise to also consider the risk of inflation too. Even if the Fed is down playing the possibility, expecting consumer demand to remain weak. They also see digitalisation as also curbing inflation.
But they have been wrong in the past and the fact that an increasing number of people are talking about it, indicates that there is the possibility. Many Fund managers haven’t know inflation and so may be ill prepared for the changes that soon may best them. Personally I am expecting inflation with the amount of fiscal stimulus that has been and continues to be poured into the system. Well worth a read.

For Interest
Runners line up as Biden vows to pick most diverse cabinet
President-elect’s task will be to ensure team is a mix of moderates and progressives. Looks at who is possibly in the running for the top jobs under Biden and Harris. Also Veteran adviser Klain named as chief of staff. Know for running a tight ship suggesting that the new administration will have a discipline and policy co-ordination that we have not seen under Trump.

Third Point’s US election gamble reaps $400m reward. Makes the point that some fund managers made a lot of money by taking positions ahead of the elections and trading positions since.
I mention it because a lot has been written recently about how passive investing is the way to go. But on the basis that Mr Loeb’s fund made 4.3% between Nov 1 and 4 there is obviously room for active management. I suspect that there wasn’t a passive fund that would show the same return over the same period. Equally the fact that he has made a further 7% since would suggest that good managers that are really actively managing money can make money. The article mentions other funds that have made similar gains. The problem for a lot of funds is that their mandates are too closely tied to benchmarks and so they are restricted in trying to out perform those benchmarks. Read also LEX Hedge funds: choose your fighter 'For hedgies, skilled in claiming they have unique and differentiated insights, the outlook is good. Even if incentive fees are uncertain, management fees can be taken to the bank.'

Muddy Waters turns fire on Spac model. Short seller bets against MultiPlan and questions ‘blank-cheque’ incentives. An interesting read. “A business model that incentivises promoters to do something — anything — with other people’s money is bound to lead to significant value destruction on occasion,” the report said. “That’s even more true when a Spac buys a business from the fourth consecutive private equity group to have owned it. C’mon, man.”
'MultiPlan had not been “under invested in” by its private equity owners Hellman & Friedman, Mr Tabak said, disputing the suggestion that they opted to take the company public via a Spac because they had no better options “for wringing juice out of the business”.'
'The Spac model has come in for criticism from some quarters for the fees and profits that accrue to their sponsors and because they can be used as a “backdoor listing” for companies that do not wish to face the scrutiny involved in a traditional initial public offering.’
I think there is a lot to be cautious about, as ever due diligence is required as with all investments. Spac’s can be useful but they carry risks too; which includes abuse.

Covid vaccine race revives pharma industry’s outlook and reputation. Public funding and benefits for wider drug portfolios lift sector hit by scandals over pricing. Looks at how their reaction to seeking a vaccine for covid has helped the sectors’ image but for the sector to really change may require greater co-operation with governments to become more involved in the process of find specific cures.
It makes you wonder if the WHO was better funded or a new type of funding, whether it could be a channel through which to work with drug companies for the global good.

Scandals rock South Korea’s booming hedge fund industry. Billions of dollars in losses undermine Seoul’s attempts to promote itself as finance hub.
A salutary article highlighting the risks of under regulation during a period of liberalisation.  It also highlights the amount of retail money that there is in Asian markets. Money that historically has not been invested into institutional funds.

‘Build back better’ slogans sugar-coat a sour reality. Asks what does the phrase really mean Summary of the article 'build back better is a beguiling, but fundamentally flawed, slogan. The pandemic is unlikely to make it easier for countries to adopt green technology, raise productivity, boost growth and make citizens happier. Everything that was difficult before the crisis is now even harder.'

India shows patchy recovery ahead of Diwali. Concern is rife that a fragile rebound in some sectors could easily fade if pandemic worsens.

A precious chance to personalise education for the digital age. A look at how technology can help educate our kids. 'We need to imagine smarter ways of delivering life-long educational opportunities and escape our exam-obsessed “treasure what we measure” mentality. If 20th-century education was all about standardisation, 21st-century education should focus on personalisation. It can and must do so'

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