Aug 20 FT China pulls punches, Pinduoduo, HK EX numbers and more
MARKETs at HK noon
JAPAN opened lower initially saw an up trend for the first 35 minutes but then reversed and sold down into lunch. Currently -0.7% Expect continued caution into the close tomorrow morning we get Japan inflation and PMI data pre market.
S KOREA Markets opened lower following the US and with raised covid concerns as daily cases continue to rise.Kosdaq initially ticked higher to test yesterdays closing but failed to hold the reversed and is still trending lower currently -3.8%. PPI data out tomorrow pre market. Kospi following a similar pattern to the Kosdaq; currently -3.1%.
TAIWAN opened slightly lower and trended lower for the first couple of hours down to 12,144 before seeing a slight bounce back to 12,400 and then traded sideways; currently -3.2% Export orders and current account data due after market.
CHINA left Prime Loan rates unchanged pre market. Opened lower and sold down to 4,680 but then bounced but failed to regain the 4,700 level and sold back to 4,680 at lunch. Currently -1.3% watch for Team China support, without market could trend lower.
HONG KONG Opened -123pts @ 20,055 vs -148pts ADRs @ 25,030 E commerce +VE except Alibaba ahead of earnings. HSBC and HK EX both weak but AIA +VE. Market then sold down sharply to test 24,800 and then trend lower finding some support around 24,660 level and traded sideways into lunch. Currently -2.1%. Earnings remain in focus.
EUROPE Expect Markets to open lower following Asia and in reaction to the FOMC minutes which were out after Europe closed Wednesday. Data due EU Construction output and UK CBI Industrial Trends data.
US Futures opened flat but have since dropped 207pts with the S&P and NDX futures weaker too. Data today Initial Claims data, Philadelphia Manufacturing Index, CB Leading Index, EIA Natural Gas Report, 30 yr TIPS Auction
China pulls its punches in face of Trump onslaught. Measured response reflects value Beijing attaches to sources of innovation.
The article looks at why China has not mounted retaliation as Trump has stepped up measures against Chinese firms. The reason seems to be that US firms are closely integrated with Chinese ones; so retaliation would hurt Chinese companies directly and impact future investment. The threat of a “non-reliable entity list” has yet to emerge; fist mentioned back in March 2019.
Companies that could be targeted include Qualcomm but hurting them could further reduce Chinese access to the tech it needs to develop it own businesses. Brands like Nike and Starbucks rely on Chinese consumers but their products and services are delivered by Chinese sales people and ordinary people like their products.
Apple’s products are assembled in China; so restrictions there would hurt Chinese companies. General Motors is closely aligned with SAIC, hurting one hurts the other. Strange to think that the historic requirement to JV with a Chinese company is now the saviour of many US interests.
It also notes that additionally once they place sanctions on US companies it is very hard to reverse them; especially if you have instigated nationalistic support. Explaining to the political base about unwinding, a change in direction is very difficult. China knows this from things like trying to reverse its one child policy another government U turns.
Pinduoduo clashes with Tesla on discounting. Pinduoduo is know for subsidising products to generate sales, last month it offered its clients the opportunity to buy a Tesla Model 3 for significantly below its Rmb291,800 ($42,200) price tag. Tesla said it wouldn’t supply the cars because it has a policy of banning the resale of its vehicles.
Many wonder if the Pinduoduo model is sustainable; historically known for cheap goods it is now trying to move up market to higher value items. But the discounts it offers which is records as sales and marketing fees are greater than its revenues which is nearly unsustainable. It has annoyed other companies like Apple by selling its phones with discounts despite not being an authorised seller. The standoff is because China is an important market to companies leaving them with few options. The article notes that Tesla’s action was criticised by 'Qiu Baochang, an expert at the official China Consumers’ Association, called Tesla’s actions “improper”. They had “hurt consumers’ legitimate rights and interests. Through giving a sizeable subsidy, Pinduoduo may have earned massive traffic. There is nothing wrong with that.”’ Which could add to further dimension.
For investors it does raise concerns about whether Pinduoduo can make money.
Hong Kong bourse profits hit record at prospect of forced delistings from US. Looks at the HK Exchange results; the stock was down yesterday as investors were disappointed that fees earnt were less than expected. Securities trading fees were -6% and listing fees were -11% and derivative trading was -22%. On the bright side income from investments was up.
It wa upbeat about the outlook noting a strong IPO pipeline and new MSCI products.
I think the key risk remains Trump taking further action to prevent US investors money going to Chinese companies. Worth noting the US State Department is asking colleges and universities to divest from Chinese holdings in their endowments, warning schools to get ahead of potentially more onerous measures on holding the shares, linked to the delisting of Chinese companies in the US. It is only a small further step to ban US investors from accessing those shares in Hong Kong.
Robust rally highlights split between winners and losers Fed-fuelled rise proves uneven with average group down 7% while Silicon Valley advances. (From yesterdays FT On-line regarding Tuesday market rally)
Key point being that the top-heavy, tech-heavy market still does not look expensive relative to bonds. Notes that the five largest stocks account for 25% of the US rally but a significant number of companies are still below their February levels. Notes ‘ Falling yields on government debt have stoked the stock market rally in several ways, beyond just providing hope that the economy can recover quickly from the pandemic. They have pushed more investors to seek higher returns in riskier assets and made equities look less expensive relative to bonds.’ But from a earnings or sales perspective things are looking stretched.
LEX Takeda/Blackstone: eschewing gum Looks at the sale of Takeda Consumer Healthcare and whilst the price is less than hoped for it makes the point that the company needs to continue to accelerate its balance sheet overhaul and sell more to Blackstone and companies like it whilst they have their cheque books out.
Tech weighting helps explain valuation gap between US stocks and peers. Looks at a recent note by James Montier, of Boston-based asset manager GMO, entitled “Reasons (Not) To Be Cheerful” in which he makes clear 'that he is sceptical of any clear link between bond yields and equity valuations. In other words, he does not believe efforts by the US Federal Reserve, which has signalled it will keep interest rates close to zero until at least the end of 2022, are behind the high valuations.’ A view that is supported by the CAPE theory of Robert Swiller
The article then sets out that it is actually the sector weighting within the indices that are causing the distortion; especially a the US has high tech weightings. That matters because they have relatively high growth and low cost of capital vs Financials. 'So simply by virtue of the US having a far larger listed technology sector, its equity market will command a higher valuation’.
In summary 'It is therefore hard to argue that US equities are any more expensive than their European counterparts. The US might have far more stocks trading at high prices, but that is by virtue of its sectoral composition, rather than it being a uniquely American phenomenon.’
Hong Kong’s national security law protects press freedom. By Matthew Cheung Kin-chung Chief Secretary for Administration, Hong Kong Special Administrative Region Government, Hong Kong. Sets out that Jimmy Lai’s arrest was not a linked to press freedom but 'suspected collusion with a foreign country or with external elements to endanger national security’ and to link to press freedom is wrong. He goes on to say that 'freedom of speech, of the press and of publication are among the rights and freedoms explicitly highlighted in Article 4 of the National Security Law’ .
I’m not sure everyone in Hong Kong sees it the same way.
The creep of unwelcome matchmaking. Looks at the attempt by the Japanese government to meddle in business. It views the move as simplistic and from politicians who have little understanding of corporate business or culture. Whilst much of Japan may look ready for consolidation the practice of making it happen is fought with problems. It notes in summary that 'The Japanese government’s problem, if Covid-19 does lure it further into the corporate matchmaking game, will be the realisation of how many quiet Hondas are lurking in corporate Japan — facing pandemic-induced crisis but fiercely protective of their culture and knowing full well why their industries have remained fragmented for so long’
Macron’s low profile on China is strategic. Looks at how France has banned Huawei without protest from China in contrast to the same decision from the UK ten days later. Notes how Marcron is trying to position himself as the the EU’s preeminent strategic thinker. It notes that
'France has big export interests, including luxury goods and aircraft. But Mr Macron’s appreciation of Chinese power goes far beyond the size of its market and he sees it as less than benign. His case for outreach to Moscow is premised on the dangers to Europe of a Russian alliance with China. He told the writer William Drozdiak that China’s President Xi Jinping was “rebuilding an empire” and was prepared to be aggressive in pushing the limits of international law.’
He doesn’t want to be linked to Trumps decoupling but for autonomy for Europe. But Europe faces difficulty in dealing with China because it often fails to use its collective bargaining power as different countries have different interests. Macro notes how China uses dividing and weakening when dealing with Europe. But Macro has made an effort to build a common front in dealing with China by holding group meetings with President Xi and others.
With Merkel standing down within a year it may rest with Mr Macron to define a sharper strategy for Europe’s dealings with China that goes beyond Beijing’s vague statements of support for international cooperation and agreement to binding commitments to open up its economy.