Aug 14 FT China war games, Vaccines, Lenovo, Swire, Chinese buyers - a risk and more

18 Aug

Aug 14 FT China war games, Vaccines, Lenovo, Swire, Chinese buyers - a risk and more

MARKETs at 1pm
JAPAN opened higher but sold down initially but found support around yesterday closing level.  Tertiary Industry Index Jun +7.9% YoY vs -2.1% May (F/cast was +1.2%) out 30 mins ago was strong than expected and the market is moving higher .  We could still some selling pressure into the close ahead of the weekend, US data tonight and Japanese GDP data pre market Monday.   Currently +0.2%
S KOREA  Kosdaq opened flat but sold down to 831 level before a small bounced and then trading effectively sideways currently -1.8%%
Kospi opened lower did see an initial uptick but then sold down to below the 2,400 level but then bounced back above and now trading sideways just above that key level currently 1.2%.
TAIWAN opened lower but has worked higher, initially to yesterdays closing level and then it traded sideways to midday, now trending slightly higher currently +0.2%
CHINA opened lower rallied into the China data then sold down for the rest of the morning to a low of 4,618 before a bounce into lunch  Currently +0.1%
HONG KONG Opened -158pts vs -116pts ADR’s seen choppy trading. rallied into the China data, sold off bounced back to a day higher and then trended lower into lunch. Currently -0.2%.  I would expect caution in the PM going into the weekend with US data and trade talks overhanging the market.
EUROPE I would expect a cautious open after the weak China data. Data due today EUROZONE GDP Growth Rate, Balance of Trade, Employment Change and FRENCH Inflation rate.
US Futures opened flat but have risen slightly. Key is that the S&P is facing resistance after failing again to make a new high and despite the good jobs data. Key seems to be the next US stimulus package which is being seen as essential for the recovery. Worth noting that Gold rallied as the US government sold more bonds (a record amount of 30yr) to help cover the US fiscal deficit. T10 yield hit 0.7% which could mark a break out. Even crypto’s saw a rally. It could be that Gold and Silver are set for another bounce. Data due today Retail Sales Data, Unit Labour Costs, Non Farm Productivity, Industrial Production, Manufacturing Production, Capacity Utilisation, Business Inventories, University of Michigan Aug Data Prelim (Current Conditions, Inflation Expectations, 5 year Inflation Expectations, Consumer Sentiment, Consumer Expectations), Baker Hughes Total Oil Rig Count.

Chinese Data this morning 
House Price Index Jul 4.8% vs +4.9% Jun (F/cast was 5%)
NBSPress Conference,
Fixed Asset Investment (YTD) Jul -1.6% vs -3.1% Jun (F/cast was -1.2%)
Industrial Production Jul +4.8% vs +4.8% Jun (F/cast was +5.5%)
Retail Sales Jul -1.1% vs -1.8% Jun (F/cast was +0.5%)
Unemployment Rate Jul 5.7% vs 5.7% Jun (F/cast was 5.7%)

House prices for 70 major Chinese cities saw the softest rise since May 2018. New home Prices Jul +0.5% vs +0.6% Jun
Fixed Asset Investment (YTD) Private investment decreased 5.7 percent (vs -9.6 percent in January-May) while public investments rose at a faster 3.8 percent (vs 2.1 percent). Investment in the primary industry grew 7.7 percent, after increasing by 3.8 in the January-May period; investment in the secondary industry went down 7.4 percent (vs -8.3 percent) on the back of manufacturing; and investment in the tertiary industry rebounded (0.8 percent vs 1 percent) due to transport, storage & postal industry; education, health and social work; and recreation & culture activities.
Retail Sales a surprise fall but one I was expecting as I believe that average Chinese consumers have turned a lot more cautious with uncertainty over jobs and the potential resurgence of covid 19. This was the seventh straight month of contraction in retail trade, with people continuing to avoid crowded places, like shops, restaurants, and cinemas.
Unemployment still unchanged which is surprising but with new graduates and school leavers coming onto the job market I would not be surprised to see the number rise especially as the economy is still recovering.

China’s war games raise Taiwan tension. Beijing holds military exercises near island in warning to Washington. China says the exercises are just to "safeguard national sovereignty” in the face of rising US diplomatic exchanges with Taipei. But the reality is they are an effort to pressure on Taiwan especially while US Sec of Health was visiting. The next key event will be the funeral of Lee Teng-hui.
The US and China are raising the stakes and China has threatened to invade Taiwan unless it submits to China. The US is committed under law to help Taiwan defend itself but it has never set out how it might intervene should the occasion arise. With Taiwan now crucial to the US’s battle with China over tech and chips one would expect its committed to increase. To an extent the worry is what would the US do to stop China getting hold of TSMC’s world leading technology.
On Thursday Taiwan increased its defence budget by 10% underlining its commitment not to submit to China’s demand.
It is interesting to see that it this high tech world one of the key areas of interest is sea mines. These can range in cost from US$2,000 fo a simple to millions of dollars for one that track specific ships or targets. They could severely hamper a Chinese marine assault for relatively little cost and would be inline with the Taiwanese defence policy which has moved from direct engagement to gorilla warfare tactics.
China ridiculed the increased budget saying “No matter how much it spends, as we all know, Taiwan is a small island. If it wants to fight against mainland China, it is like an ant trying to move a tree,”

Covid vaccine hopefuls vie for backing in New York and Shanghai. Vaccines are still very much in focus despite Russia saying it had developed a vaccine (which hasn’t yet done stage three trials yet). Whether its developing the vaccine or being able to put it into production its a key topic and it's no longer a case of 'winner take all’.
The article mentions a number of key players; Cure-Vac which is preparing to sell shares in New York and CanSino which saw its shares soar on their debut in Shanghai.
The key being that there is political pressure along with research issues and many of the companies have no profits to show and a lot of costs, so high risk but with huge rewards if they succeed. The reality is that the pharmaceutical model has been fashioned that way for many years and it unlikely to change.

Lenovo makes US gains despite sanctions threat. Reported strong sales and profit growth for Q2 and gains US market share. It managed to expanded its US laptop and desktop computer market share to 16% in 1H 2020, trailing only HP and Dell said IDC. Customers including the US Air Force bought its laptops for staff working from home. But there could be risks ahead, especially as the Chinese Government owns a stake the company. However the fact that it operates a dual HQ with one being in North Carolina may’ve it some relief. It is currently barred by some US cereal agencies but not all of them. The defence department still buys its laptops as was warned about security threat but the air force said it a robust programme to manage the IT risk.
The article mentions how it has employed a number of western executives to help it navigate the global markets which has helped but also it has upset some Chinese executives that the Westerners carry too much sway.
I think there are some major risks but much of it will depend on Trump and the China hawks mood.

Carlsberg disappoints with profit warning Worth noting because it mentioned the lockdown in China as being part of the reason which has implications for the other beer sellers in Asia like China resources and Anheuser’s Budweiser BrewingCo (1876 HK). On China the company noted that its Q3 had started well but then been hit by more regional lockdowns.

Chinese-owned miner tipped into leverage pits. Jersey’s Consolidated Minerals offers cautionary tale of a business snapped up by a buyer with friends in Beijing. Looks at the rise and fall of Jia Tianjiang. Like many in China he benefitted from friends within the state system but was also subject to the corruption background. In common with a number of other cases he owned a large stake in a bank and was able to secure loans from the bank.
It notes that he like others used acquired assets to acquire more loans and assets; often off-shore. Certainly since 2016 many Chinese people and companies have been trying to acquire off-shore assets in the hope of keeping them safe from Beijing.
The article mentions though how many of these assets have then floundered because of the precarious funding behind the transaction; like France’s Baccarat Crystal, the UK’s House of Fraser and Seaworld in the US. Many expect more examples to come in the months ahead as their Chinese owner come under pressure

LEX Swire Pacific: hong out to dry. Looks at how Swire once one of the largest HSI constituents is now its smallest as all its business lines have been hit by the pandemic.
Breaking up the group would make sense but finding buyers would be difficult at present. Notably its operating profits do not cover its interest payments. Lex recommends that investors wait to see a clearer restructuring plan before buying the stock.

Lenders to Swissport offer rescue package Proposal to restructure $2bn debt could transfer ownership from HNA. This would have obvious implications to HNA which might see their equity and the more junior debt wiped out.

Japan dismantles long tradition of cross-shareholdings by Makiko Hakozaki a Japan equity fund manager at Russell Investments
She is positive about the outlook for Japanese stocks on the basis that corporate governance standards are improving, with the rise of external directors and she thinks the drop in anti-takeover measures. Specifically defensive cross holdings, which has often led to underperforming executives managing to remain in position. She notes that cross holding have dropped to 10% from circa 34% in the 1990’s and should drop further as the Japanese banks adopt new capital adequacy rules meaning they will have to liquidate some of their large equity holdings. She also thinks that companies that fail to move with the times will not attracted international investors. But it only covers listed companies there’s a similar problem in unlisted companies and regulators should address that issue too. She mentions that some companies are now saying that what were cross holdings are ’neo’ cross-shareholdings for investment purposes. These will be explained and demonstrated clearly for investors.
Overall she thinks that now the rules have been established that more Japanese companies will adopt the new way and that will enable Japanese companies to make up lost ground on US and European rivals in the next five years.
I think she may be right but the recent rule changes to prevent shareholder activism could be an example of one step forward (cross holdings), two steps back (activism).

For Interest
TikTok and OpenAI reveal deep learning’s potential to disrupt.
Notes how is was a small firm that came up with the alogo’s and framework that hooked TikTok users, when it had been expected that the large companies with access to masses of data. Now Microsoft is looking to buy TikTok so that it can learn from the start up.
It also looks at how AI is looking to build ever larger language systems. These can then be used to decipher what searchers are looking for in complex queries.
It them poses the question what would happen if you applied even more computing power to the issue? The answer automatic writing systems that can pass for a real person on most issues. But is may also be able to make connections that we humans haven’t thought of yet. Nice quote
'The thought experiment involving an infinite number of monkeys, hammering away at an infinite number of typewriters, posits that one of them must eventually write the complete works of Shakespeare. Far more interesting, though, could be the many other things the monkeys would come up with along the way, including the oeuvres of writers who never existed.
It would still take human intelligence to “understand” the systems’ mindless output. But as with TikTok’s recommendation engine, the results, if properly channelled, could be significant. '

Oil demand will be lower than expected due to latest spread of virus, IEA warns. It has cut its forecast saying it was “the first downgrade in several months, reflecting the stalling of mobility as the number of Covid-19 cases remains high” and the ongoing “weakness in the aviation sector”. The agency added: “Recent mobility data suggest the recovery has plateaued in many regions.”
The IEA said global oil supply was expected to be roughly steady in August despite Saudi Arabia leading Opec in starting to add back some production. Also that the drop in production in the US and Opec-led cuts implied the oil market would be in a small deficit in the second half of the year but the level of uncertainty over supply and demand meant any recovery was “delicate”.

A new generation of investors is trying to revive blank cheque companies that can be used to list more cheaply on the stock market. But they must first overcome a history of poor financial performance.
Very topical at the moment and a useful background read.

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