Nov 29 FT Weekend Stocks best month; what next, China on Bond defaults and Australia and more.

02 Dec

Global stocks close in on best-ever month.  MSCI’s index of developed and emerging equity markets is up almost 13% in November.  Driven by the removal of the uncertainty over the US election and getting a ‘Goldilocks’ results with Biden as President and the Republican’s still controlling Congress (as long as they win the run-offs in Georgia).  More positive news on Covid and the availability of vaccines has also  encouraged investors to look through the recent resurgence in covid cases and buy more risky assets.  As seen in the US$89bn being invested in equity funds over three weeks in November.  
Now the question is where is the upside going to come from?
The fact that AstraZeneca’s/Oxford University drug will need to re-run trials, although the initial mistake seems to have been fortuitous one, has raised some questions. There are also questions about re infections and asymptomatic cases and their role in the spread of the virus.
So currently investors are left wondering how best to position themselves into the year end and 2021.
Interesting to see the Gold has come off the highs and back to July levels and Oil has risen.
A big current question for investors seems to revolve around how much damage has been done to the US economy by the lack of a new stimulus package; talk of scarring, at a time when we have seen Initial claims rising. Other issues on the horizon include the fall out between the Treasury and Fed with implications over the availability of emergency funds. Also whether, in the final days of the Trump administration, there will be more ’spoiling tactics’. Plus what happens to real estate and the associated loans when mortgage holidays end? What will the new consumer patterns be; post pandemic?
I think that a lot of value plays will be re-visited, many already have, some of the scrutiny will need to be different but key will be good fundamentals with debt levels being key. It will not just be a matter of getting through the pandemic but also appraising which companies will be able to thrive post covid pandemic, in whatever the new business world looks like.
For China; it has benefited from the expansion in medical equipment needs but that will not last. It is seeing some production lines being relocated due to both tariffs and covid concentration. It is also being challenged on its access to US technology and that is unlikely change in the short term. The recent defaults in its credit and bond markets are prompting a reassessment of risk in China which is both good and bad.
There are still good opportunities but good research and due diligence will be essential.

US malls deserted on Black Friday as digital first-timers fuel online surge Chess boards and PlayStations in demand as older shoppers in rural areas shun stores to go online. Not exactly a black Friday first as on-line sales have been rising in previous years but probably the most dramatic change to normal patterns due to covid. Worth noting that Amazon, Walmart and Target saw good traction but companies like Simon’s Property group were probably suffering. It is also interesting to note that the retailers also changed their approach. Many have offered discounts over longer periods but physical stores are also limiting shoppers and taking temperatures. But also in making the store deals available on-line.
I am still a fan of Techtronics (669 HK) its dropped back from the recent high HK$115 and closed at HK$101.20 on Friday at these levels I believe it is worth accumulating. US consumers I think will continue to focus on home improvement as we enter the post pandemic stage.

Out of step HK infections traced to older women’s dancing lessons. Looks at how the the latest resurgence of covid cases, with 92 reported Friday in Hong Kong being linked to the dance classes which the article notes is frequented by; evidently wealthy older women. Carrie Lam has been swift to rebuke the attendees. It does note that in total Hong Kong has had 6,000 confirmed cases and 108 covid deaths out of a population of 8m. The case, to an extent, I think, reflects the frustration of the public as the measures being imposed on them and their wish to return to a normal way of life. Worth reading Market Thinking's Always Covid, Never Christmas [ ]
which puts forward that the control of covid is now less about public health and more about not relinquishing power.
Worth also reading Coronavirus roars full throttle into rural America. After months of ignoring public health advice, residents are succumbing to illness as Dakotas become pandemic hotbed

Spate of defaults shakes confidence in China bonds Looks at the how the recent defaults may upset China’s plans to reduce the dependance of Chinese companies on loans from the state owned banks. China has recently gained acceptance from the FTSE Russell (an important bond index manger) for it to include Chinese Government debt.
The government has tried to reassure people with vice premier Liu He saying that authorities would “severely” crack down on illegal behaviour on bond financing, ranging from “malicious” transfer of assets to misuse of funds.
The article also notes that Beijing also hopes to 'lessen the moral hazards arising from incestuous links between local governments, state banks and state-owned enterprises, Mr Liu needs Wall Street help to increase the size and sophistication of China’s bond market.’
The article notes that 'it will be some time before foreign investors dare to dabble in bonds issued by the likes of Yongcheng Coal and Electricity Holding Group, which defaulted on a supposedly triple-A, Rmb1bn ($152m) bond, triggering this month’s tremors. As of August, foreign investors held only about Rmb100bn worth of onshore non-financial corporate bonds, compared with their central government bond holdings of Rmb1.6tn.’
The key thing is that it will make investors more aware of the risks and hopefully result in a better risk grading of Chinese companies both State owned and private.
It also demonstrates that whilst in many ways China is a developed market parts still have a long way to go and that investors both Chinese and International will need to constantly re-assess the risk and assumptions made when investing.

Beijing steps up tariffs on Australian wine. Spat escalates as coal ships blocked from docking and taxes of up to 212% imposed. The latest escalation of the dispute between the two. Most interesting is the fact that China is not delaying any iron ore shipments, these it needs. But for other things that are not essential it is delaying imports; that includes coal, along with Barley, Beef and Seafood. China is Australia’s largest overseas market for wine. It would be interesting to see the reaction is Australia were to restrict iron ore?
As Australia points out 'Beijing's investigation was “erroneous in fact and in substance” and gave rise to the perception China was targeting the country over political matters. He added that the decision “is completely incompatible with the commitments given through the China-Australia Free Trade Agreement and through the World Trade Organization. It’s incompatible with a rules-based trading system”. It will also raise questions about China’s commitment to the recently signed RCEP that was signed last week.
Various articles have been written on the general deterioration this week and it underlines the growing view that China is clearly not willing to work within the established guidelines and not content with restricting free speech within its borders it is now trying to restrict free speech outside its borders.
Many expect that under Biden China could face a lot more pressure as western nations present a more united approach in dealing with China. Biden has also started that he will hold China to account and to uphold its agreements.
The first test of that could come quite soon as China is unlikely to be able to make the agreed level of purchases from the US under the phase 1 Traded Agreement.
For investors it raises the additional diplomatic risk of dealing with China.

China crackdown on Australia coking coal imports sends prices down 25%. Again related to the dispute between China and Australia over Covid and Huawei. Illustrates China’s influence on coal prices and the fact that if the ban continues it could lead to the benchmark price being set with regard to Indian or Chinese import prices as the yardstick. Also shows the bully boy tactics that China is prepared to use. As I mentioned above it would be interesting to see how China would react if Australia banned iron ore exports to China in retaliation. Iron ore is the one commodity that China cannot easily get from other sources but coal it can. For Australia it also means that it will be looking for other export markets for its coal unless there is a change of mind in China.

Xi lauds China’s ‘bloodsucking capitalist’. President champions 19th century entrepreneur Zhang Jian in apparent dig at Ant’s Ma. 'Mr Xi said Zhang was a “role model” for China’s entrepreneurs. “When you see a virtuous person, follow his example,” he added, calling on China’s private sector business leaders to “strengthen their feelings for the country and assume social responsibilities”.’
Looks at Zhang's background and life during from passing the scholars exams and got access to imperial circles and then with state support built a successful textile group and other enterprises. Notes he was also sympathetic to reformist movements that aspired to modernise China. He was able interface between the east and west.
President Xi has adopted those parts of Zhang life that suit his purpose 'true patriots must also love the party and follow its dictates’ and ignores those parts that don’t. Quotes a Professor Shao who says that “Zhang went his separate way and built Nantong as a local, independent and self-governing model for the rest of China,” said Prof Shao. “If anything, he provides an excellent example of separating the political regime and the country, and serving the interests of the country instead of the regime.”
An interesting read; shows how the party propaganda machinery is prepared to pick those things which suit its narrative and overlook those that do not like the good work that Jack Ma’s charity foundation does in China.
If anything is serves to remind us that there are many in China, who love China but want to reform it for the good of the Chinese. The trouble is often that the administration is unable to accommodate the changes that should occur because it is too worried about losing control.

Arm China chief claims vote to remove him from helm was invalid. The Chief of Arm China is seeking defend his actions in seizing control of Arm China as more details about the personal $100m investment fund that caused him to fall out with the UK parent. An interesting read but for investors it illustrates the problems with dealing with Chinese entities. It is particularly interesting because I think most western investors have been struck by the lack of government or legal support for the parent company. Also by the ‘behind the scenes’ arrangements that were taking place. Whilst those may happen in western companies the legal implications are usually more straightforward and enforceable.
It could have a big impact on how companies structure themselves to work with and in China. Made more important by China’s design to build its own tech that is not subject to US control or sanctions. Also the concerns that HK’s judiciary could also be under threat. Hong Kong law has been one of the keys to giving the confidence that global investors needed to be sure their investments would be safe. Undermining that could seriously undermine China’s ability to attract the investment and knowledge that it needs to achieve its dreams.

Renewables red tape risks driving Sony plant away from Japan. 'Sony has warned that it might have to shift manufacturing out of Japan unless renewable energy rules are relaxed, as it tries to meet the green energy promises of customers such as Apple, according to a minister.’ Article note that Sony is not the only one. The problem being that renewable energy in Japan is scarce and the price high. Japan is aware of the issue and has launched a task force to examine the situation but that suggests that it will be some time before a solution is achieved. The problem is Japan’s land use laws; with many calling on the government to ease land use rules and those for coastlines and ports so that solar and wind farms can be built.
Says that Sony’s European sites run on renewable energy, those in China will by the end of March and by 2030 for those in North America. But the factories in Japan are where it faces the greatest challenges. Interesting to see how the manufacturers are increasingly be caught in the middle by their clients who want to be seen as green and the realities of the infrastructure.

For interest
Investors are right to peer through gloom and spy an upturn

John Plender looks at the disconnect between the markets and the Main Street. Thinks the market is right to look beyond the current disconnect and focus on a powerful 2021 recovery. Many households have built up excess savings which means potential spending. Added to the expectation of economic stimulus.
But it cautions that market driven by policy are often strong up future trouble. Currently central banks assets buying programmes are distorting risk reward.
'One obvious example relates to the discipline imposed by bond market vigilantes when excessive government bond issuance threatens a return of inflation. There is simply no point in investors refusing to absorb government paper if the central banks will mop it up regardless.’
He refers to Keynes’ 'euthanasia of the rentier where investors relying on interest income would struggle to survive as rates fall. In today’s world of low and negative interest rates, we are witnessing both the euthanasia of the rentier and of the bond vigilante.'
He notes the mis-pricing of risk, which is something I have been writing about for a couple of years and notes that moral hazard 'Ultra-low interest rates provide an incentive to borrow because they take the pain out of debt servicing.’
That he notes has prompted a debt binge 'The Institute of International Finance, a finance trade body, estimates that global debt will rise more than $20tn from 2019 levels to $277tn by the end of the year, equivalent to 365 per cent of GDP.’
So a debt binge and an inability to generate growth is a dangerous combination when Central Banks are running out of new levers to pull. He also notes the liquidity trap that is occurring 'interest rates are so low that households and companies hoard cash. When that happens, monetary stimulus ceases to have much impact on the price level.’
That he contends means that inflation is an increasing possibility 'because entral banks will be reluctant to destabilise the economy and financial system by raising interest rates when debt is at unprecedented levels for fear of jeopardising their independence.’
In summary then he says
'Equities are on heady valuations. In the short term, the market will toss and turn in response to coronavirus and vaccine news.
With fund managers’ cash holdings now back down to pre-coronavirus levels, according to the Bank of America global fund managers’ survey, a wobbly period may be due. But long-term investors should sit it out. News on fiscal policy will probably improve and a recovery is undoubtedly coming.’

I think he is right; investors should ensure that they are positioned for the recovery with a balance; some big tech is prudent but skewed to the recovery, some value but good companies that will be leaders in the post pandemic world with solid balance sheets and prudent levels of debt, where possible locked in at low rates for the long term.

Lunch with the FT Chris Kempczinski ‘Our menu is very Darwinian’
The McDonald’s chief executive took over after his predecessor was felled by scandal — then Covid-19 hit. Over a Filet-O-Fish and a glass of Cabernet, he tells Andrew Edgecliffe-Johnson about fast food in a crisis, meat-free burgers and why he eats at his own chain twice a day

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