Nov 18 FT China Frozen Food, SoE defaults, Futures & History , Mkt Updates

22 Nov

MARKETs @ 1pm HK time

Markets mixed on the outlook; with some expecting a faster global recovery now that we have two vaccines for covid and more likely. But will markets around historic highs investors are turning cautious in case expectations have got ahead fo themselves. Softbank’s Mr Son says he’s preparing for a wore case scenario! Rotation still evident.

JAPAN opened lower and initially trended lower to 25,720 level before rebounding to 25,830 and then trade sideways. The pre market trade data was good and better than expected but I think the fact that the market closed yesterday at 29 year high and Softbank’s Mr Son saying said he aggressively sold assets this year to prepare for a “worst case scenario” that could take place if the world shuts down in a second wave of coronavirus outbreaks; just as covid cases in Asia, Europe and the US hit highs is prompting investors to be cautious. Currently -200pts (-0.8%) @ 25,815. Autos seeing weakness as Yen strengthens
Balance of Trade Oct Yen 872b vs 687.8b Sept revised (Consensus was 250bn)
Exports Oct -0.2% YoY vs -4.9% Sept (F/cast was -4.5%)
Imports Oct -13.3% YoY vs -17.4% Sept redivided (F/cast was -9%)
Exports 23rd month of contraction but only the second with single digit which is an improvement and suggests recovery. Shipments of transport equipment fell by 1.9% vs -7.2% Sept, while exports of machinery -2.8% vs -7.8% prior, due to power generating machinery (-4.3%) and computers and units (-3.3%). Also, sales of manufactured goods tumbled 3.7%, dragged by iron & steel products (-20.4%).  Exports increased to China (10.2%), the United States (2.5%), Taiwan (1.9%), and South Korea (9%), whereas sales to Western Europe 7.9%.
Imports fell for an 18th month, Purchases of transport equipment -31.8% mainly due to a 79.6% fall in aircraft. Purchases of mineral fuels -38.5%, (Petroleum -42.6%). Imports fell from China -3.7%, Hong Kong -16%, Taiwan -8.8%, South Korea -19.5%, the US -15.6% and Western Europe -10.8%.
Kospi seeing chopping sideways trading basically in the range 2,550 - 2,537, currently +6pts (+0.3%) @ 2,546
Kosdaq opened higher an initial dip but then worked higher back to 850 the recent resistance and traded sideways, currently +11pts (+1.3%) @ 850
TAIWAN opened higher saw an initial dip but then rebounded immediately and worked higher to 13,655 and then traded sideways for 90minutes before working higher to test 13,750. currently +148pts (+1.1%) @ 13,840
CHINA opened lower @ 4,890 but rallied to 4,911and has seen choppy trading in the range throughout the morning Currently +7pts (+0.1%) @ 4,901
HONG KONG Opened @ 26,434 +19pts vs +30pts ADR’s, initially sold down to 26,350 saw a slow bounce to flat and then spiked into lunch +155pts (+0.5%) @ 26,535. Ecommerce seeing a rebound with Financials, Consumer and Autos being good interest
EUROPE Expect markets to open lower with continued covid concerns and caution ahead of the UK inflation data
Data due
EUROZONE New Car Registrations, Core Inflation Rate, Inflation Rate
UK Inflation Rate, Core Inflation Rate, Retail Price Index, PPI Output, PPI Core Output, PPI Input. Speech from BoE’s Haldane
US Futures opened flat but drift slightly lower in Asian time
Data. MBA Mortgage Applications and 30 yr Mortgage Rate, Housing Starts, Building Permits, EIA Oil Stocks Change Report.
Speeches from Fed’s Evans, Williams, Bullard and Bostic
Earnings: NVIDIA, Target, Lowe’s, TJX, L Brands, Copa Holdings, Shoe Carnival, Jack in the Box

Beijing focuses on frozen food after virus find. China remains adamant that cold chain transport carries a serious risk on infection. This comes as many other countries; significantly those whose exports to China are being stopped rebuff the claims. There is some research to support Beijing’s claim but it is theoretical rather than from real examples.
It raises the question why Beijing would adopt this tack? Could it be to reduce imported foods and promote domestic consumption? Maybe China knows something about how the virus first got out and hence its concern over cold chain transport? I doubt we will ever really know but for meantime frozen food exporters to China are going to be under pressure.

China state enterprises pull $2.4bn of bond sales after defaults spook buyers. The recent bond defaults in China have prompted many to suspend planned sales. It raises the question of whether the provincial governments are in a position to bail out the companies and whether the central government would step in too. An interesting comment from a SOE executive that “There is no way that we will be liquidated according to market principles,” the executive added, according to a transcript of his comments viewed by the Financial Times. “We have more than 180,000 employees. If we go under, our workers will lose their jobs . . . Does the provincial government not know the consequence of this?”
Some wonder however whether the government will allow market forces to weed out the weaklings .
I was reading another report that said the defaults have prompted the State Council to ask government departments to conduct a risk assessment, over the recent bond defaults. The aim is to ensure stability in financial markets and to prevent any spillover effects from the credit sphere that could cause systemic risks, said the people. If there is a risk of contagion, the regulator will have a response plan, although the people said that the initiative doesn't mean that there will be bailouts.
As I have written before the yields in China are attractive but there are risks is now being seen. The historic assumption that Beijing would always back the SOE’s has always been a false one. Ever since the first GITIC failed investors should have been aware that China will do what is in China’s best interests.

Shanghai challenges London with copper futures launch. Monthly contract in renminbi aims to increase Beijing’s influence over global prices.  The Shanghai International Energy Exchange (INE) will start trading monthly copper futures denominated in renminbi from tomorrow, in contracts based on metal to be delivered into warehouses in China. Will be in competition with the London copper contract in the hope that it will help Beijing increase its influence over the pricing of copper and increase the used of the RMB in the global financial system. Expected to be a success as China consumes over 50% of the copper mined globally. The new contract will be open to foreigners directly (unlike the existing one that is only available via a Chinese company) and will be Ex VAT and so more akin to the International price.

China war drama pulled for disrespecting past. Shows the power of nationalist critics; they show it fails to respect history. They say the young stars playing the army leaders are excessively pandering to younger viewers and see the portrayal of heroes as flirtatious, mansion-living, cigar-smoking and coffee-drinking hell-raisers was inaccurate, if not “slanderous”. The People’s Daily said it should respect history. The producers expressed their deep regret but did point out that many communist leaders during the second world war were young, hot-blooded revolutionaries. But it reveals that President Xi’s has tightened control about how history is portrayed and the power of the nationalist forum within China. It is not the first to upset critics/censors. The recent successful’ The Eight Hundred’ was the subject of much re-shooting to make it acceptable. Some Western films have also been subject to criticism outside of China for pandering to the Chinese censors. But as the potential audiences and box office receipts in China are huge it has a lot of sway.

Pinduoduo seeks $5.6bn of funding to take on China’s supermarkets. Looking to take advantage of the change in attitude to going to the wet markets or super markets in China for daily essentials. The article says the funding will be used to 'invest in staff, warehouses, cold chain logistics and transport in order to resolve “fundamental roadblocks” to one-day delivery of farm goods across the country.’
The problem will remain that its a low margin business and some think it could just be a ploy to try and increase users numbers.
The company has yet to turn a profit and has been a regular in raising capital from the markets. It has also attempted to build a logistics network before but failed. This time they say they what they build will be of a totally different scale.
To me there are many features of the company that I am cautious about and I think that with the increasing regulation of the Ecommerce business in China that now would not be a good time to get involved.

LEX Baidu/live streaming: late mover disadvantage Looks at Bidu’s intention to buy JOYY and thinks Baidu is late to the game. 'Baidu is late to live streaming, as it was in short video apps. The winners staked their claim more than two years ago. Baidu is becoming a contrary indicator: its live streaming expansion signals the craze may soon be over.’

Editorial Asia deal is a wake-up call for free trade. A new pact underlines the diminution of US influence in the region. Looks at the RCEP; notes that it brings Asia closer to a cohesive group albeit a loose arrangement but key is that it is without the US and does have China. If China acts wisely it could be a good platform from which to build its soft power base. It also increases the value for Biden to getting the US back into the CPTPP which was born out of the original TPP that Obama was involved in. It also notes that India withdrew from the RCEP fearing its businesses would be overwhelmed by Chinese imports and so must also decide what it will do.
In my my view this does give China a good opportunity but it will also face issues. If it seeks to dominate and force its policy over the other members it could also undermine its own position. Within days of the agreement being signed it continues to rebuke Australia and tell her that the current impasse is all Australia’s fault. That is not a good way to demonstrate to your business partners that you are all equal, which is the basis of the RCEP.

Walmart and Home Depot sales surge. Big-box chains build on popularity of home maintenance and cooking. Looks the the results which were good. Walmart is seeing a slowing of sales but not so at Home Depot. FT says 'Home improvement was “receiving more than its historical share of consumer spending”, said Richard McPhail, Home Depot’s chief financial officer.’
Both companies saw their shares trade lower although, that could have been because of the weak US Retail Sales number, it might have been because Home Depot is looking to make the temporary additional payments to staff more permanent; it is difficult to say. But I continue to think the outlook remains +VE. 
We get results from Lowe’s tonight.
I continuing to see that as good news for Techtronics (669 HK) whose share price rallied on the open although it did then sell down.

Economics. Why inflation could be on the way back The world may be shifting regimes as globalisation recedes and countries struggle to replicate China’s rise.. Reviews the book The Great Demographic Reversal by Charles Good-hart and Manoj Pradhan, which predicts we are about top enter a period of unexpectedly high inflation. Thinks 'The authors are correct in arguing that the world economy is undergoing big structural shifts. Ageing and a weakening of globalisation in the production of goods are well under way. Moreover, this process includes China. That combination will transform our economies.’ But cautions we actually know very little about how these in fact work out in the real world.
Summaries by saying
'It is not even clear that globalisation was the main historic driver of changes in labour markets. It was just one element in a set of transformations — new technologies, the shareholder-value-maximisation model of corporate governance, the rising role of finance and growing monopoly power.
Doubts about these theses are warranted. But it is also dangerous to extrapolate the present into the future. In 1965, few imagined that postwar Keynesianism would shortly die. The world of “lower for longer” may similarly vanish. Big changes are in process. We need to think rigorously about how our future may differ from out past.’Well worth a read.

Why you should not fret about value investing. Looks at value investing but makes the point that the capital asset pricing model behind much of the historic value investing is a nice theory but does not work in practice, not least because markets are not efficient! Also makes the point 'many investors and market observers still conflate value investing with the value factor. Value investing is buying something for less than it is worth. The value factor is an ersatz measure of gaps between price and value. Worse, the relevance of the value factor is fading.’ Basically that a lot of the factors and elements from when CAPM was first put forward have changed; tangible and intangibles to mention but one.
In summary
'Fundamental value investors should focus on gaps between price and value for securities. The present value of future cash flows, not misleading multiples, are the source of value. As Charlie Munger, Warren Buffett’s partner at Berkshire Hathaway, has said: “All good investing is value investing.” The value factor may be floundering, but value investing is relevant and useful as ever.'

Hedge funds face heat over role in March bond market turmoil. Looks at the Financial Stability Board’s report over the events in March. Key was that the Fed stepped in quickly and prevented the situation from getting out of control. But hedge funds came under scrutiny because they tend to take large positions to benefit from the small moves. In March the situation was exacerbated by Central Banks along with other investors and hedge funds seeking to raise cash. It was an unusual event and it is difficult to see how one would practically put measures in place for a one off event without distorting the more normal daily operations. Still it will be one more topic for the G20 ministers to discuss at the weekend.

Amazon takes aim at pharmacy sector with 80% discounts on generic drugs. A new disruption to the already competitive prescription medicine market and with the offering of discounts and free delivery it is likely to put both CVS Health, Walgreens and Rite Aid under pressure (their share prices were lower on the news). Notes that some customers, usually older ones then to prefer local pharmacists but still it will be a radical shake up.

Banking regulator argues against restarting dividends. A current hot topic but the regulator taking a cautious approach basically saying the until we know that the covid crisis is over and that the reasonable post pandemic fall out has occurred banks should hold onto their capital. If the feared defaults do not happen then then banks will be able to resume making payouts.
Nice quote “Banks are not pulling back credit like they did [during the financial crisis] to save themselves at the expense of the broad economy,” she noted. “That’s a good thing; we can give them a gold star and a pat on the back, but we should also remember this is part of their job. Banks are supposed . . . to absorb and not amplify shocks and downturns to the economy. “Nor is this benevolence or charity. This is the business they are in and for most of them it makes them a lot of money,” she added.

FT BIG READ. EUROZONE ECONOMY. Europe enters damage limitation mode
While hopes are rising for the rollout of vaccination programmes, the bloc’s countries and companies must first navigate a turbulent period of restrictions caused by the second wave of the virus.

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