Aug 18 FT Oracle & TikTok? Tencent & Voodoo, China Auto strain, US/China decoupling just the start

20 Aug

Aug 18 FT Oracle & TikTok? Tencent & Voodoo, China Auto strain, US/China decoupling just the start

MARKETs at 1pm HK time 
JAPAN opened flat, Tankan index Aug -33 vs -44 Jul (F/cast was -32) an improvement in manufacturing but still heavy declines in exports and now a sharp drop in services.  Index trended lower with support around 22,950 before lunch. PM opened around 23k level and trading sideways   Currently -0.2%
S KOREA  re opened Kosdaq opened slightly lower but sold down to825 level in the first 20 minutes, rebounded to 833 level but then trended lower to find support around 823 level.  Now traded sideways currently -1.2%
Kospi opened lower but trended higher in choppy trading to day high 2,420 level but the revised down to 2,390 level before bouncing. Now back above 2,400 and looks to trade sideways Currently flat
TAIWAN opened slightly higher but trended lower to 12,850 support and then worked higher to 12,900 and now trading sideways currently -0.5%
CHINA opened flat and initially sold down to 4,792 then traded sideways in the a range 4,800 - 4,815 (yesterday’s close) before rallying into lunch  Currently +0.1%
HONG KONG Opened higher +124pts vs +29pts ADR’s (25,375) but then sold down to flat and traded sideways for 30 minutes before selling down to 25,270 level before rebounding into lunch. Currently  +0.2%
EUROPE Expect markets to open flat as covid concerns and US/China relations continue to overhang the markets and no data to influence the markets
US Futures  Dow opened -10pts edged higher to +50pts but now back to -8pts , S&P and NDX slightly +VE. Data due out today Housing Starts, Building Permits, Redbook, API Crude Oil Stocks Change

Former CIA officer charged with spying for China
. A naturalised US citizen who was born in Hong Kong, is charged with spying for China. Outlines the evidence of the case although there are bound to be questions about why they waited so long to being the action. Another -VE for sentiment towards China in the US.

Oracle enters race to buy TikTok’s US operations; said to be working with a group of investors that already own a stake in ByteDance; including General Atlantic and Sequoia Capital.

China’s share of global exports falls in supply chains rethink. Looks at the findings from a new report by Baker McKenzie and Silk Road Associates. Key being that 'companies were looking to geographically diversify their supply chains, build in more safety layers, and supervise them more strictly.
'But the study’s authors believe that the pandemic, and the disruption it brought to global supply chains centred on China, is accelerating the changes. “What we have seen so far has been a shift in the final assembly of the product, with a lot of the components still coming out of China,” said Ben Simpfendorfer, chief executive of Silk Road Associates. “The supply chain as it was built in China over the past 20 years will be replicated — but it needs time.”'

Guangzhou bans frozen meat, fish and seafood over virus fears.
Beijing continues to stress that it sees refrigerated foods as a potential carrier of the virus despite the WHO saying there is no evidence. The most recent case was from frozen Chicken wings from Brazil.
The article quotes 'Xi Chen, a public health policy academic at Yale university, said the positive tests were probably triggered by lingering genetic material of a dead virus, incapable of infecting humans.’
Guangdong is focusing on food supply chains after Fresh Hippo (backed by Alibaba) found one of its employees was infected.
It illustrates how little is really know about the transmission of the virus at this stage which suggests the issue os going to be with us for a long time.

Tencent buys into games maker Voodoo Deal comes as Chinese group looks to step up investment in Europe. It’s a minority investment but gives Voodoo an enterprise value of $1.4bn, making it the first “unicorn” company in the fast-growing “hyper-casual” gaming market. Games which look simple but are often difficult to complete and are popular in China. Voodoo hope the investment will allow it to move into the casual game market; by using Tencent’s knowledge and experience. It will also be a useful backer to help it expand its Asia Pacific footprint.
The article notes that once again Tencent has paid up to get an investment is what is seen as being a quality company, which is rarer in Europe than Silicon Vally. It also comes at a time when Chinese firms are encountering more resistance to doing deals in the US.
Other recent European deals by Tencent include
Norwegian game developer Funcom, valued at $160m being completed.
Yager Development, Berlin-based studio behind Spec Ops: The Line.
Tencent led a $45m funding round for Lydia, a French mobile payments company. IUniversal Music Group, with the Chinese group leading a consortium that paid $3.3bn for a 10 per cent stake, closed in March.

China cars strain Profit plunge forces Geely to cut sales target and sets back global ambitions. Notes that the slow pace of recovery is putting pressure on car sales which had already been slowing. Geely lowered its target to 1.36m vehicles from 1.4m. That is slightly less than the average and reflects that Geely is still expecting new launches to go well. It mentioned supply chain disruption but also that its market share had increased to 6.5% from 6.1%.
It mentioned that is would be seeking a second listing in China and that it would look to develop EV’s. The merger with Volvo however continues to be on hold.

Opinion US-China decoupling has only just begun by Gideon Rachman
Notes that the after 40 years on integration between US and China many hope that the current crisis will be patched up and things return to the normal.
That he says is complacent and in fact decoupling has a lot further to go. It is spreading from Tech into Finance and in time will impact every large industry, from manufacturing to consumer goods; in Europe as well as the US and elsewhere.
Key being that in the past business logic overruled. But that has changed and now politics is the dominant factor. It is not just Trump but in the US its bipartisan. In China its been President Xi’s ambition that China no longer hides its power; seen in the building of military bases in the South China Sea and 'ended the autonomy of Hong Kong and imprisoned millions of Uighur Muslims in Xinjiang. Military threats to Taiwan are becoming more overt.’ One could also mention the more aggressive action against India and the Belt and Road programme too.
Who started it will long be the subject of debate but now both sides are in confrontation. The more action the US takes the more China is likely to retaliate. To quote
'If the US takes more measures against WeChat and Huawei, Beijing is likely to respond by further restricting US tech companies in China. As political tension mounts, so American consumer brands will be vulnerable to boycotts by a nationalistic Chinese public. That is potentially bad news for high-profile American brands such as Starbucks and the National Basketball Association.
Emotions aside, decoupling is also driven by new assessments of risk. The vulnerability of Chinese companies including ZTE and Huawei to bans on sales of US computer chips has intensified China’s drive to become self-sufficient in key technologies. US companies are also hedging their bets. Apple, which has built its business around manufacturing in China, is making its latest iPhone in India, as well as China.'
The conflict is moving to finance and the weaponisation of the USD being brought against China. So far on a limited scale but more is possible. The next stage could be to financially sanction Chinese companies out of the USD system.
US banks are bringing more companies to the US markets and are presuming that if Trump does force them to comply or delist they can still make money in Hong Kong . But that shouldn’t be taken for granted. Trump could seek to ban US funds investing in Chinese stocks.
Trump is also forcing other countries to take sides with Huawei being a prime example. Whilst business wants to stay neutral and get on with commerce that may no longer be possible.

Japan’s GDP falls by less than US or Europe. Looks at Mondays GDP data and notes that the relative performance was better than the UK and Europe but lagged S Korean and Taiwan.
For Japan private consumption accounted for 4.8 percentage points of the drop and exports for 3 percentage points. It notes how business was resilient and contributed just 0.2 percentage points to the overall decline in output. That figure could be revised but it does suggest resilience.
Currently Japan is seeing a resurgence in cases but has not announced and State of Emergency and seeks to avoid doing so. The BoJ continues to look to support the economy. Key factors remain a vaccine and cure but also how without those government policy for Q4 when flu will also be an issue and also next year.

LEX Honda: scoot over. Notes how its low cost scooters are key to it being able toi exit the pandemic in good shape and avoid a merger with Nissan. Whilst the company is suffering like everyone its motorcycle division is doing well.
'There are other things going right. Localised production has helped Honda avoid supply chain disruptions. An in-house engineering system, which allows it to make different models from the same production line, has given it an edge in innovation.
That last factor will offer another reason it did not find a merger with Nissan attractive. Sharing common parts and plants, to reduce costs, would not have fit Honda’s set-up.
Honda’s low valuation does not reflect its growth potential as the only motorcycle maker among Japan’s big three carmakers, allowing it to capture the latest shift in consumer demand.
As economies shrink, low prices and practicality are the new fashion.’

LEX Fintech lenders: marketplace of hope. 'The hype around fintech lenders in the early 2010s has dissipated. Big banks retained huge advantages: cheap funding from deposits, brand names and entrenched market positions. Still, the likes of Goldman Sachs want to crack online lending, revealing the resilience of the concept. The question remains whether a pure start-up can overcome the hurdles to shine within the broader US financial services sector. This latest economic rout will, however, not be the ideal environment to find out.'

US online loans defy fears of mass delinquencies. 'According to a report from the data provider dv01, impaired marketplace loans — those that have fallen behind on payments or accepted payment forbearance — are 9.7 per cent of the total, up from about 6 per cent before the crisis began.’
That is down from its peak of 16% in April. But notes that about 66% of the impaired loans are in forbearance. They are still running at less than credit cards and mortgages.
This means that securtisation is active and rates remains close to 2019 levels.
It would appear that personal loans are seen as the most important unsecured debt for repayment by consumers; probably because they often carry high levels of interest and defaults can hurt credit scores for other types of loans.

Why Buffett’s trades look like everyone else’s, for once. Looks at Buffets recent trades and whilst they might seem to run against much of what we have come to expect from Buffett there is logic in the moves.
It notes that whilst Buffett has been selling the banks he has sold more of the riskier banks and is still holding a large chunk of BoA which has one of the least risky balance sheets of the US banks.
His purchase of gold could just be opportunistic.
The bigger question the article poses is whether Buffett ands lieutenants have a new strategy to reverse years of under performance. High holdings in energy, consumer brands, and financials have worked against them. It once made super profits by being able to offer good companies in distress loans but the Fed has squeezed it out of that space. So the question with these moves are their bigger moves ahead?
I would suggest that with his recent acceptance of Tech there could be and if he applies the same attention to detail to that area as he has in others then it will be worth following.

Carlyle tells staff to avoid public transport. Looks at the new policies being introduced in London as companies prepare to re-open their offices.
Key being that work from home is becoming an acceptable part of the package with most making working in the office voluntary.
I my view it will be interesting to see how many staff actually want to return to the office after months of working remotely at home.

Small-caps no longer deliver big gains for US investors. Structural shifts have cast doubt on the effectiveness of a popular investment strategy. An interesting read and worth noting that in Japan, Europe, UK and Australia small caps continue to outperform blue chips equity indices. In China they have only narrowly underperformed.
The question is then will the same factors as have undermined their good performance in US impact them as well? The Russell is said to have under performed because covid harmed smaller, more domestically-oriented companies to a greater degree than multinationals. But other factors may be at work like ‘electronic trading, which has made buying and selling smaller stocks much cheaper, and a proliferation of information on even the smallest companies, which has made it more difficult to unearth gems that others have overlooked.’
Along with 'a less hostile US antitrust environment and the huge economies of scale enjoyed by technology groups’.
Worth thinking about.

LEX Tech rally: pricey party. Questions the growth prospects, notes earnings are more robust but valuations are high and wonders if tech could be facing a Dotcom moment. 'More robust earnings, partly due to subscription revenues (83 per cent of total at software companies), do help. Microsoft’s recurring revenue stream has expanded since 2009. At 25 times forward earnings the sector is half as expensive as it was at the dotcom peak. The current 5 times forward sales is about a third lower.
Less overtly stretched valuations make a repeat of the dramatic collapse that ended the previous bubble appear less likely.
The rally may be out of synch with the wider economy but tech investors have little incentive to sober up.'

For interest
US mall operator becomes its own tenant
. Simon is estimated to part-own about 400 stores in its properties. Looks at how the company is buying a number of retailers out of bankruptcy and the implications for its own Malls and those of its rivals. An interesting read.

FT BIG READ. US ELECTION Biden’s green gamble. Republicans say the Democrat’s proposals threaten tens of thousands of jobs. But lower clean energy costs, technological progress and the devastation of the pandemic make even a $2tn plan seem politically viable.

Time to plug the public market ‘listing gap’. Looks at a recent Morgan Stanly report on why institutional investors want more exposure to private markets, dominated by buyout funds and venture capital.
Uses a case example of the Vision Fund. Key points are that
“Periods of strong investor commitments are generally followed by periods of weak returns.”
It recommends that 'Rather than shifting ever more assets to private markets, mainstream institutional investors would be better advised to help make public markets more welcoming for start-ups.’
'Institutional fund managers would benefit most from plugging that gap in public markets. They should be playing the game they know best, rather than fooling around with investment taekwondo.’
Worth a read.

* The email will not be published on the website.