Aug 1 FT Weekend HK elections, Nvidia, Linkedin Spies, Xinjiang lockdown, Giant Bikes and more

04 Aug

Aug 1 FT Weekend HK elections, Nvidia, Linkedin Spies, Xinjiang lockdown, Giant Bikes and more

US hits out at Beijing after Hong Kong postpones elections citing virus fears It came the day after the government disqualified 12 local pro democracy candidates for various reasons but primarily their refusal to support the New Security Law.  Carrie Lam said “If the election continues on September 6, it will not fit the requirements of a fair and open election. It will also put the health of voters, candidates, supporters and electoral staff at risk,”  as she used emergency powers to enforce her decision.
Many think that this has been Beijing intention ever since its candidate did so badly in the last local elections and it realise that is was possible for it to lose the September elections.
Other reasons cited by Carrie Lam were that many voters were in mainland China or overseas and not able to return in time because fo travel restrictions.
Carrie Lam said she believed that public opinion was with her on this decision. Although published pools reveal that is not the case. A survey released on Friday by the Hong Kong Public Opinion Research Institute, a pollster for the opposition’s primary election, showed that 36 per cent of 9,000 respondents supported a delay while 55 per cent wanted it to proceed as planned.
Also announced on Friday was the resignation of David Leung the head of the public prosecution service saying that he had been sidelined from cases under new China-imposed national security legislation and didn’t see ‘eye to eye’ with justice secretary Teresa Cheng. Suggests a growing rift in the civil services between Beijing hardline supporters and Hong Kong citizens.
Also announced was that the police were seeking activist Nathan Law and 5 others for inciting secession and collusion, insider says. Law and others deny charges, which would be first issued against individuals outside Hong Kong.
For the market on Monday the news is likely to be a slight -VE for sentiment for retail investors. I would also expect renewed mainland support for the HSI as China will want to show that the news has not been negative for the the HSI. Rather like Trump China is saying that positive markets show that its policies are right.

Nvidia eyes $32bn deal to buy Arm. A $32bn deal would be +VE for Softbank. However it may raise concerns for Arm’s big licensees Apple, Broad-com and Qualcomm who see Nvidia as a competitor.
The article notes that ARM has not been success that Softbank hoped it would be when it acquired the company back in 2016. Also SoftBank announced recently that it had cut the ‘internet of things’ business that was supposed to be a key driver at Arm, from the company and put it into another unit.
The use of stock would allow Nvidia to take advantage of its recent 151% rally in share price over the past year. But there is still the question mark over Nvidia’s Chinese operations which are being held to ransom by the American Chinese Chief executive who was fired by the UK board but holds the company seals and says he is still in charge. That could have a significant impact on the final price along with being an embarrassment for Chinese governance.

LinkedIn spy scandal exposes China tactics. Beijing’s agents are targeting officials with high-level security clearances. Looks at the case of Dickson Yeo who admitted in court that he worked for the China’s intelligence service. It is interesting that China has not denied the claim.
The article notes that the case ‘underscores growing fears among intelligence agencies around the world that they are unable to parry China’s increasingly astute online espionage efforts aimed at officials with high-level security clearances.’ It highlight how much information there is out there and the fact that individuals are keen to try and make the most of their knowledge for personal gain. It says 'The Pentagon said defence department workers were not banned from using LinkedIn but were “trained in the risks associated with exposing personal information on social media sites, and obliged to protect any information pertaining to the operations” of the government.’
The risks are well known and one would hope that the Pentagon and others have large departments so that ‘workers’ can contact Pentagon staff to give notice of any ‘contacts’. In days of ’Tinker, Tailor, Soldier, Spy’ such contacts were used to feed false information but I guess that’s more difficult these days.

China locks down restive Xinjiang province to contain infections rise. There have been over 500 cases reported since Mid July and despite the blanket use of surveillance and movement controls. Unlike the outbreaks in other regions which have been openly discussed and the transmission chain identify there is very little information coming out of Xinjiang. Once again the inability to identify the source is the most worrying aspect. But the general lack of reporting is raising concerns about the social and political situation in the region. Many are concerned that the virus could be spreading rampantly through the detention centres and other facilities and whether that was the governments intention. The fact that the clamp down has been seen as harsher than those seen in other areas is a concern. The short notice of the lock down and with no indication of when it would end is of concern.

Bike makers’ shares race ahead as pandemic reshapes landscape. Social distancing has bolstered demand, but supply chain issues make valuations look high.
Looks at outlook for Shimano and Giant. Both companies are have seen their share price rally but both are concerned about investing too much in expansion at this stage and also about how the production can be disrupted by the shortage of just one part.
Giant is aware on the tensions with China and the fact that the more affordable part are made there. But its production is mainly in Taiwan and whilst some automation is possible its aware of the need of components and the potential for bottle necks.
Shimano is similarly aware and looking to move from cross-border chains to completing whole components in country; it currently has production in China, Malaysia, Singapore, Hungary and Japan. A good read and both companies worth watching although the potential for upside from here looks limited they may be short candidates.

In the same vein Fauci blames Covid surge on states’ failure to follow advice. He told Congress that some states were not following the official advice. The hearing also saw evidence that refuted Trumps claims that the virus would disappear and that the US was doing no worse than other countries.
All the social distancing measures are designed to slow the transmission while we await a vaccine or cure but in not following even the basic guidelines we increase the risks.
What is of more concern is the rise of new cases in countries that are seemingly adhere to the social distancing rules. That would suggest that the virus is finding new transmission methods and that should be a worry.

Also read the Editorial A dangerous moment for the world economy. Rise in European cases shows there is no respite from coronavirus. It notes that restarting of economies has lead to a rise in covid cases (except New Zealand which has isolated itself from the world.). Economic damage has been high, globally; as seen in the recent data. The FOMC said 'the prognosis for the economy now depends on progress against the virus.’ It notes cheap money will do little to stimulate when more lockdowns are possible. So Governments already worried by increased borrowing will have to continue and hope that subsequent lockdowns are less damaging than previous ones as lessons are learnt. Key is lockdowns don’t stop covid. A vaccine or cure will be necessary for a full recovery to be possible. It notes 'The fight against coronavirus is debilitating but it is far from over.’
It is certainly true and markets continue to operate on the basis of supply and demand. Tech continues to dominate whilst the virus dominates. Other sectors such as food and essentials are also likely to do well. Key for investors is careful accumulation of good names. Politics is also rising in importance with Governments under scrutiny over how they deal with covid and I think even Beijing is aware of that pressure.
Worth reading Being boring helps Unilever to clean up. Notes that 'In times of uncertainty, there is a lot to be said for boring conglomerates.'

Obituary First popularly elected Taiwan president who irked China. Lee Teng-hui Politician 1923-2020. A good read on the man who took Taiwan from autocratic to democratic and ‘cemented Taiwan’s identity as distinct from China’.
In his later years he became increasingly anti China. His final speech included "We all hope to establish a democratic, free, prosperous country that has human rights and dignities,” Lee said. “We don’t want to be bothered with unification, don’t want to be ruled by others and we’re proud to tell anyone we are Taiwanese.”
Worth a read.

For interest
Big Tech defies global economic fallout with blockbuster earnings. Apple, Amazon, Facebook and Google prosper in face of virus and scrutiny by US Congress.
Looks at how the companies posted good results and how they rallied in after hours trading an impressive juxtaposition on the rest of the US economy which shrank over the quarter. It notes that without regulatory intervention they will continue to occupy a larger and larger amount of the US economy. The results surprised most people I think. The companies themselves, who are facing the potential for increased regulation seem sanguine about the prospects. To quote from the article
'Facing one question from an analyst, Sundar Pichai, chief executive of Google, said: “If there are any areas to adapt, we will.’
Worth also reading Under the hood Silicon Valley’s sway over US market comes with risks attached. Notes that due to their dominance the direction of the wider market is determined by whether they have a good or bad day. It tends to be be the same in most markets but maybe the prominence of these companies just makes it more stark.
I remember when starting as a sales trader in HK; the HSI was effective dominated by HSBC, Mobile, Hutch and SHKP with maybe Cheung Kong for good measure; get those right or as some did play the futures in them and you could move the market. Today its Tencent, Mobile, CNOOC and Chinese Financials. But in August expect more dominance from E commerce names. The compilers of indexes, even when they apply weightings, are always going to face problems which is why good stock picker should be able to out perform.
See Lex Big Tech: fearsome foursome The US government is preoccupied with its coronavirus response. But the impetus to crack down on Big Tech has not diminished.
See also LEX iPhones: slow burn. Looks at Apples remarkable performance and notes Customers are loyal — three-quarters stick with iPhones when making online trade-ins. But to encourage more upgrades Apple needs to produce standout new models, not slower old ones.

Pimco warns ‘significant pain’ lies ahead for malls and offices. Riskier types of commercial mortgage-backed bonds face more pandemic-linked stress.
I have for sometime been warning of further fall out from the bonds backed by commercial mortgages. It seems Pimco is also worried and I think a lot more people ought top be worried too. The safest triple A rated tranches have bounced back since the March sell off thanks to the Fed. But below that risk premiums are rising. The article notes 'it would take just 7 per cent of the underlying borrowers in a triple B rated slice of these instruments to default to leave bondholders with losses.’ But the risks on conduit deals (deals, which are backed by pools of smaller mortgages across multiple properties) could mean that that 7% could be triggered quite soon. I think that could then trigger a kick on effect which will hit the funds more than banks. Funds that were forced to seek risker assets in search of yield as Government bonds yields fell.
There are also the risks in mortgages, especially those benefiting from current mortgage holidays. I doubt people are saving their mortgage money to be able to start repayments, many need to money to survive now. So the potential for another huge round of defaults in the future is high in my view. Still worth a read.

FT BIG READ. US ECONOMY. Greenback blues After surging when the pandemic first hit, the dollar has had its worst month in a decade. The move reflects worries about America’s economy and its virus response, stirring debate about the currency’s global role.
Looks at the fundamentals and the variables that have changed and are changing. The key is that at present there is no viable alternative to the USD as the reserve currency. Although it notes that at one time that was said about Sterling too.
It looks at various topics
Rising Gold,
How stimulus weakens the greenback; impact on bonds,
Rising Euro,
China, and notes that the fact that the renminbi is not fully convertible stops it playing role.
An interesting read, nothing is going to happen over night. The US mis-management of covid is a concern but can be rectified over time. But for the meantime markets will have to play with the deck we have.

Also Investors in gold and buyers of bonds cannot both be right. It looks at some research from Dario Perkins, managing director for global macro research at TS Lombard. He has looked at the correlation between Bonds and Gold. Mr Perkins has run the numbers going back a century and a half, and says that gold has occasionally offered a useful alternative but more often has been positively correlated with stocks at times when bonds have too. The only problem I see with that is that bonds have not been in their current position which makes historic comparisons of limited use.
I would agree that betting on inflation in the past has left many investors hurt. But again we have never seen this level of stimulus.
It is an interesting read but I cannot see a historic scenario that is comparable to the one we are in and hence whilst history can be a useful guide but trying to draw any absolutes this time around is really just guessing.

Kodak’s lessons in corporate reinvention The pandemic is forcing many companies to consider radical change. Kodak is an interesting case because of the reasons behind it not wanting to change in the 1970’s to digital. It’s also interesting because of its previous reinvention attempts; crypto amongst other things. The editorial also looks at Sony and Nokia. A good reminder that nothing in business remains the same forever. Covid may be accelerating the need for companies to change; nice quote
'One of Nokia’s former chief executives, Stephen Elop, who tried to effect its reinvention, famously advocated radical change by comparing the company’s situation in 2011 to standing on a burning oil platform. With much of the economy today burning around them, managers should have an easier task persuading colleagues and investors that it is the moment to jump.’

A slightly different angle from White House turns to the past with help from Kodak which questions the logic of using Kodak. The key theme of the article is 'Rather than deal with the acute emergency, Trump is attempting to end dependence on foreigners’.

Aslo Opinion Grasp this chance to revive the public markets which also mentions Kodak. But its main focus is on making listed companies more appealing and in part delisting companies more difficult.

Worth a read Start-ups for silver surfers — the crisis has driven more over-65s online
Looks at a new fund set up by an 85 year old to focus on starts up to serve the over 65’s. Makes a lot of sense. Making digital tech easier for the over 65’s should be a good market, especially in times of covid; when technology can be a great help to them but for many of them the prospect seems daunting; strange since tech is supposed to make out lives easier.

Also in the Life and Arts
Will Covid-19 tame China’s wildlife trade? Blamed for triggering the pandemic, markets selling exotic species have been banned. But the state faces a daunting task in limiting the economic fallout. It says it will compensate people like snake breeders but so far the government has delayed making payments putting ordinary people under stress.

It’s time to coexist with China, not ‘cancel’ it. Tech World Cyber-security fears are triggering a rush to ban the likes of Huawei and TikTok — but scrutiny and safeguards are better than boycotts and disengagement, argues Yuan Yang. An interesting read.

Luxury yacht or Hermès bag? What the wealthy are buying. Amid the pandemic, jewellers, auction houses and property agents report brisk business in rare gems and $19m Hamptons homes.

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