Aug 17 FT Chinese banks grow in HK, Fund to rebuke China? Japanese mergers?
MARKETs as at 1pm HK time
JAPAN opened lower as GDP data came in weaker than expected. Market saw an initial uptick but then sold down to 23,100 and then traded sideways into lunch. PM saw it open around 23,100 but dip lower but now working back. Currently -0.8%
S KOREA Market closed, re-opens Tuesday.
TAIWAN opened slightly higher as good local results keep investors focused. Market worked higher to around 12,935 and then has traded sideways currently +1.1%
CHINA CSI 300 opened higher and worked higher through the morning. Despite the trade talks being postponed and the poor data out on Friday. Suggests that team China is active or that investors are expecting more stimulus. I doubt its stimulus hopes because to date investors have waited for announcements. Currently +2.4%
HONG KONG Opened pre market +29pts vs -59pts ADRs (25,124) Initial ticked lower but then worked higher in two large steps to around 25,500 and then worked sideways into lunch. Holding 25,500 will be a challenge. High turnover partly because of the HSI changes announced after market Friday but I also think Team China active to support the market as a sign of confidence. Earnings continue to be in focus this week.
EUROPE I would expect the markets to open higher, with only the Bundesbank report due to day focus is likely to be on covid and the potential for a deal on US stimulus.
US Futures Dow opened +48pts and have risen to +72pts since opening, S&P and NDX also pointing higher. Investors will be watching to see if the S&P can break higher but may are worried the rally if showing fatigue.
Chinese influence grows in Hong Kong banking More mainland companies turn towards the city as US-Beijing tension heightens. Looks at how Chinese group are expanding based on SFC data in Hong Kong as international banks curb their expansion plans.
The growth of Chinese firms in Hong Kong has long been part of the Chinese plan, the state backed firms has sought to try and build their International clientele. Also to be able to offer mainland clients access to international products again in order to be able to compete with the western firms coming into China.
In the early stages, 5 years ago, there was a rush to buy local brokers as a way to establish a bridgehead into Hong Kong but tighter regulations have curtailed that.
Now there are still niche brokers being set up backed with mainland money but the wider growth is limited and becoming more focused. The other reason for the rise is in response to more international clients wanting to know more about the Chinese companies. These firms have big research departments in China and whilst the quality of the research may not yet be on a par with International firms they have a lot more information than many western firms and better relationships with the management which is key to fund managers.
The big problem as I see it is that there is still an unwillingness by some of the Chinese firms to expand outside their established Chinese client base. They have made limited in roads to the western fund management houses and whilst they are key for IPO’s their more regular interaction on coverage and trading is limited. Often because much of their research is carried out and published in Chinese first and later translated into English for international clients. This was in part due to the fact that when they first come to Hong Kong they had close links with a number of Mainland Chinese fund managers setting up in Hong Kong and they focused on these clients. But as the FT a little while ago noted the likes of E Funds and others have curtailed their operations which means the Chinese brokers will have to look to develop new clients for their long term success.
In the early stages a 5 years ago there was a rush to buy local brokers as a way to establish a bridgehead into Hong Kong but tighter regulations have curtailed that. Bu
The article notes the rise of China International Capital Corporation which does have some of the best research and access to Chinese companies. It notes that since 2019 its expanded its headcount by more than 130 or 20% and now employs more than 500 investment bankers in the city.
It is benefitting from the fact that increasingly Chinese companies are looking to Hong Kong as a source of funding as US/China tensions suggest that access to the US in the future may become limited as Trump seeks to tighten the rules for non US companies.
It also notes that with China now taxing overseas income at 45% many mainland bankers may prefer to stay at home. But it will be interesting to see if they recruit more westerners in an effort to building their client bases with the international funds.
US stance on South China Sea undermined by Philippines As the US Navy starts one of the largest military exercises today (Rim of the Pacific 2020) involving 10 nations the Philippines is absent. In part because of Chinese pressure as a number of the island which it claims have been made into Chinese military outposts.
It notes that 'Delfin Lorenzana, Manila’s normally hawkish defence secretary, ruled the country out of participating in naval exercises in the South China Sea.
“President Rodrigo Duterte has a standing order to us, to me, that we should not involve ourselves in naval exercises in the South China Sea except in our national water, the 12-mile distance from our shores,” Mr Lorenzana said.’
But the US has been encouraged by the fact that they have a mutual defence treaty with the Philippines. Also that the Philippines didn’t cancel an agreement governing US forces visiting the Philippines.
It notes that the Philippines is a key to the US military strategy for combat against China.
China has built a significant number of outposts and militarised them despite telling the world it wasn’t going to. It claims the South China Sea in defiance of an international ruling that says it has no claim. These actions undermine China’s credibility and call into doubt its credentials as a world leader.
Fund groups urged to rebuke China. Looks at how a number of UK politicians including the former Conservative party leader calling on large investors to rebuke China’s crackdown on Hong Kong. In an age of rising ESG it's an interesting point as to whether fund managers should be taking a stand. On the flip side is the ability to invest which could be compromised by taking such a stand. I think the key is that it is up to International politicians to take the lead. They did against S Africa and apartheid and it yielded results.
Japan officials eyed Nissan-Honda merger to create auto champion. Looks at a government plan from earlier this year to try and create an auto champion. Evidently the plan did not get very far because both sides rejected the idea. Does note that auto industry mergers as notoriously difficult because of disagreements over technology and increasingly complex capital structures. All of which is unfortunate because even today it is a sector that really requires more consolidation.
Covid-19 prompts rethink of the case for real estate. By Dambisa Moyo a global economist and the author most recently of ‘Edge of Chaos’
Thinks that property is now riskier than before.
1 Remote working has been shown to be viable and could results in a scaling back of large office demand, a change from expensive city accommodation to cheaper suburban residences. An increase in the use of technology resulting in the need for less employees and physical premises.
2. Post covid governments will look for new sources of revenue with real estate taxes more likely than income taxes. Along with maybe reducing tax incentives for owning property (tax relief on interest payments etc).
3. Property has historically been a good way of preserving wealth and protecting against inflation but with many thinking that inflation is no longer a threat that advantage is less appealing.
4. Demographic shifts with ageing populations there will be fewer buyers; again putting downward pressure on property.
So the writer thinks that investors need to rethink whether property will project or erode their wealth
My view is that whilst remote working has been shown to be viable many still prefer working in offices for the team aspect rather than remotely and alone. The desire to live in cities is not just driven by work but social factors too and hence I think there will always be demand for town/city living. On the points of taxation and inflation I think is too early to make a call. Yes government will need to raise taxes but suspect the easy targets will be those who have done well during the pandemic especially the tech companies. Inflation I think will return at some point; with some much money being printed and given to individuals it seems inevitable.
Worth also reading Ultra-low rates boost Brookfield’s asset values Canadian group’s financial landscape changed by Covid-19, which notes at “With all government debt now paying a nil return,” he said “the alternatives of real estate, infrastructure, [and other real assets] have become even more compelling.”
Ping-pong table prompts car sales epiphany. Auto groups launch direct internet sales to bypass expensive dealer networks as pandemic drives customers online. Looks at how the CEO of Peugeot realised how easy it was to order on-line when he went into a store to buy a ping pong table. That realisation sparked a drive for direct sales via the internet and the potential death of many car showrooms. Dealerships may well survive as they make most of their money from the after sales and servicing but again they will be impacted.
It also notes that advertising is likely to be done centrally and that discounting may disappear, it notes that with Tesla’s you can’t negotiate the price, others want to follow that model.
An interesting read.
Bidenomics and the new New Deal Looks at Biden's plan which contains a number of elements that Trump promised last time around. His running mate Ms Harris and the benefits she could bring. Also the fact that Biden is good at compromise something that Trump has not been good for. It also notes that Trump’s objection to the current pandemic bill seems more tied up with undermining postal voting than helping Americans during the crisis.
Worth a read.