Aug 25 FT Huawei, Covid re infection, ChiNext, Tencent, MediaTek and more


27 Aug

Aug 25 FT  Huawei, Covid re infection, ChiNext, Tencent, MediaTek and more

I was on RTHK’s Money talk this morning, hosted by Peter Lewis and discussing with Carlos Casanova of Coface, amongst other things; the new ChiNext Rules and the what could halt the current market rally.  Click the link to listen, discussion starts @ 6:50 minutes into the podcast
https://www.rthk.hk/radio/radio3/programme/money_talk/episode/701421

MARKETs at 1:30pm HK time
JAPAN opened higher and worked higher into lunch. PM re-open was around the day high, now drifting a little lower Currently +1.8%
S KOREA Pre market Consumer Confidence data showed an improvement but that was pre the recent covid outbreak but markets opened higher and worked higher in choppy trading through the morning and then traded sideways in the PM, Kosdaq currently +1.9% and the Kospi +1.3%.
TAIWAN opened higher and worked higher to 12,810 level in the first hour then retrenched to 12,750 and traded sideways currently +0.9%
CHINA CSI 300 opened higher and rallied to 4,800 in the first 30 mins but then sold down, initial support at 4,780 which held a couple of times but the to 4,765 into lunch, that was below the opening level. PM opened at 4,770 level but trending lower Currently +0.1% but watch for Team China support into the close.
HONG KONG Opened +35pts at 25,587 vs -122pts ADR’s as expected with elevated shorts Monday. Tested 25,600 initially but then sold down to 25,370 before a small bounce into lunch. PM opened at 25,400 but trending lower. Currently -0.7%Results in focus and I think worries about more US action against China.
EUROPE I would expect markets to open higher following the US and Asian lead and as the US futures are higher too. German GDP Growth Rate (expected to be weak), Ifo data (Business Climate, Current Conditions, Expectations - is expected to show an improvement) and UK CBI Distributive Trades.
US Futures opened flat but worked higher and currently +156pts with the S&P and NDX higher too. Data due today Redbook, Case-Shiller Home Price, House Price Index, New Home Sales, Consumer Confidence, Richmond Fed Manufacturing Index, API Crude Oil Stocks.


India snub on Huawei 5G gear risks fresh political tensions with Beijing. Whilst there isn’t a formal ban or any public announcements the telco companies are clear that they should avoid Chinese equipment in their networks. Bad news for Huawei who had been on e of the biggest suppliers in India and for ZTE. It does put both Bharti Airtel and Vodafone under more cost pressure however which may result in higher costs for consumers. Reliance Jia says it does not use Chinese equipment and plans to develop its own 5G kit.This is a direct result of the border clash between China and India and it should prompt Beijing to rethink some of its strategy regarding India. It would appear that the original plan was to put pressure on India and ’take it down a peg’ but the result has been very different and hasn’t just impacted Huawei and ZTE but a lot of other Chinese companies. It may well turn out to be a turning point for a lot of China’s neighbours who are fed up with Chinese encroachment in the South China Sea and in business. Certainly China is facing a more united opposition to its actions in the South China Sea.

First proven case of Covid-19 reinfection announced by Hong Kong researchers. A worrying development not only from the re-infection point of view but also the fact that the two strains of the virus that infected him are different. It had already been seen thought that immunity didn’t last for long, in this case less than 5 months. The question remains are too how serious the second infection was or whether there was some immune response. For the drug makers a positive as it means that like the flu we are likely to need a constant stream of vaccines to deal with the virus as it mutates.

Shenzhen’s ChiNext reforms trigger wild first-day moves up to 3,000%. Looks at the impact of the rule changes for the ChiNext which saw some dramatic moves yesterday. Comes as China tries to make its domestic markets a more viable option for Chinese companies needing raise finance in the face of being cut off from US listings and not qualifying for Hong Kong ones. It following the lead set by the Star board earlier this year of allowing free movement of stocks on listing for the first five days and then being subject to a daily +/-20% restriction.
The initial volatility is a problem mush of which stems from the fact that the Chinese market is mainly driven by retail investors and therefore there isn’t the market structure to allow pre IPO price discovery as there is in more established markets. Previously companies had to be approved to be listed and they were told the price to list at with price limits on how far stocks could move per day which also had its problems. This is a step in the right direction but without a large institutional market to develop real price discovery it will be difficult to change.
China is keen to use household savings to help satisfy its companies need for capital, especially those they don’t have access to the SOE Banks. But headlines like this one mean a lot of ordinary citizens jump into the market and many get hurt which is also a problem. The government has been a lot more cautious in control what is said on social media about investing and warning about the downside too but it will remain an issue until more institutional players are present.
We discussed this on Money Talk this morning with Carlos Casanova economist for coface. click on the link to listen, discussion starts @ 6:50 minutes into the podcast
https://www.rthk.hk/radio/radio3/programme/money_talk/episode/701421

LEX Tencent: backfire backtrack. Looks at the how Trumps actions to stop people using WeChat and TikTok could hurt US companies. The disruption is more to WeChat users which many US companies, like Starbucks and Walmart use to connect with clients; as well as the impact to Apple iPhone sales. Whilst legal action is underway the Tencent rebounded yesterday on news that companies would still be able to use WeChat. Shows that Trump will have to be careful about the domestic impact of his actions. I still think has underestimated the political impact of banning TikTok can have especially with first time voters who love the app. With few political cares that group could vote against him for just for the TikTok ban!

Japan aims to ease ban on returning foreign residents. Its been a point of contention for some time and many would say that Japan often discriminates against foreigners but in this case it seems the government is changing its policy because its worried about the damage to business. Coming at a time when Japan is hoping that it can attract more financial firms after the imposition by China of a new security law in Hong Kong. At this stage no formal announcement has been made but the decision is said to be announced shortly the article says.
It’s an important move because of Japan’s shrinking population and the need to attract foreign workers and will have undermined much of PM Abe’s efforts to attract more skilled worker to Japan since easing the visa requirements started when he took office in 2012.

Huawei ban hurts Taiwan’s ‘bandit phone king’. MediaTek’s founder has been caught in the crossfire of the US sanctions campaign. Looks at how the US bank on chip sales to Huawei could have a been a positive game changer for MediaTek but the recent tightening of the sanctions have turned it into a negative one.
It notes that 'There remained some uncertainty about the full impact of the rule changes because the US government could still issue licences for certain suppliers to continue selling to Huawei temporarily if vital US interests were at stake, analysts said.’
It also notes that Huawei’s competitors will no doubt take up some of the slack but they tend to use MediaTek cheaper Dimensity 700 5G chip set rather than the more expensive one that Huawei uses.
The article notes MediaTek’s background and how it managed to break into the very competitive smartphone market. The article sets out its tech is good; 'The Dimensity’s price tag is expected to be significantly lower than that of Qualcomm’s latest Snapdragon chip, with long battery power and high energy efficiency.'
So the question investors will be asking is whether it can re-invent itself again post Huawei?

Blackstone buys Takeda’s consumer health unit. The deal had been expected and is now complete. It will set a value market as Daiichi Sankyo, Eisai and others also consider sales of their OTC businesses. For Blackstone they have a five year plan to build the business and then list it.
It notes that financing the deal was not straightforward and suggests foreign an domestic PE groups may face difficulty in raising money for such deals which are expected to increase as Japanese companies seek to raise cash by selling off non-core assets. Historically the core Japanese banks have been very willing to provide money but now they are more selective.
The deal was hit by covid and its interesting to note that probably helped Blackstone as rivals were not able to send teams to Japan to conduct due diligence.
This I think is an area where block chain could prove to be important. Having verified documentation would make the process much easier. It will also probably prompt some entrepreneurs to set up teams in countries that are prepared to carry out on-site inspections for firms unable to travel.
For Takeda it’s a start in lowering its debt level since the Shire acquisition but it needs to do more as Lex recently suggested.

Insurers flaunt price-setting clout to drum up funds from investors. The wave of claims from covid is considered manageable but the key point is that it is likely to allow sector to justify premium rises for new policies. That should improve profitability going forward. So +VE for the insurance companies but not without risks. An interesting read, not least because of the presence of new start ups who do not have the legacy claims that a number of the established firms have.
Worth a read.

‘Low forever’ mantra on rates underpins extraordinary rally. Set out that the biggest reason for markets recovering so quickly is the low interest rates and the expectation that they will not rise. Post 2009 it says the mantra was ‘lower for longer’ not that is ‘lower forever’. Bad news for banks, which it says Warren Buffet has been dumping. I don’t think that’s quite true he’s been selectively selling and rotating into the banks with the lowest risk of loan defaults, so you could say he was still hedged in favour of inflation down the road.
But he is right, low rates has huge consequences for the finance industry .
He summarises 'whether pension funds desperate to know where they can eke out returns or banks looking at loan books. And when investors are anticipating that money will in real, inflation-adjusted terms be free for at least the next decade, what would be considered a fair price for all other financial assets inevitably must be revisited.
Perhaps the other topic for those financially-savvy grandchildren will be why equities were ever so cheap.

For Interest
Investors polarised by hedges against inflation.
Simultaneous worries over deflation and rising prices explain breadth of asset rallies. An interesting read and high lights the bipolar nature of the market at present. One difficulty is in assessing whether the data we currently use to measure inflation is actually representative. Then there is the impact of stimulus, what happens when the salary subsidy schemes end.
“Investors are right to be concerned, given either of these scenarios has the potential to capsize a broad recovery in assets that has encompassed everything from stocks to precious metals and government bonds,”
'The recovery in stock markets rests on central bank stimulus, which could be threatened by a sharp rise in inflation. Meanwhile, a descent into lasting deflation would mean investors had overestimated the strength of the recovery,’ said Kacper Brzezniak, a portfolio manager at Allianz Global Investors.
I think over estimating the strength of the recovery is a key element; Markets are looking past covid and saying all is well but Main Street is seeing a very different picture. Only time will tell.

LEX Dividends: weighed down Looks at the cut in dividends as highlighted by the recent Janus Henderson report. It looks at the differences between how the US and European regulators reacted. Europe halted dividend payments the US did not.
In the US dividends are less important than in Europe. When covid hit US companies stopped buybacks not dividends. Notes that whilst buybacks can destroy value if made at high prices there is a greater flexibility in the US approach that European companies should consider.
'For those dependent on a reliable dividend flow, the outlook is worrying. An “attractive” yield, once 5 per cent, is now more like 3 per cent. Companies will find themselves under pressure to be generous. Then again, interest rates have collapsed. The plummeting yields on corporate bonds make the search for income increasingly desperate. '

Small business credit crisis risks further unbalancing US economy
Looks at the Feds Main Street Landing Programme (MSLP). But notes that covid prompted many large companies to issue bonds because the Fed said it would buy them. But smaller companies who were not big enough to issue bonds rising debt has been a concern; and it says access to credit has been a 'more Darwinian struggle.’ Key being the size often is more important than creditworthiness. Cites the Fed’s latest survey of bank loan officers which showed that a net 70% of them were tightening conditions on bread-and-butter corporate loans — making this the deepest credit crunch since the depths of the financial crisis.
Bonds it notes are more predominant in the US than Europe and Asia where companies have access to more vibrant local banking systems.
It also mentions that corporate bankruptcies so far have been less than feared so far.
With regard to the MSLP it was aimed at smaller and often less sophisticated borrowers but relies on local banks arranging the loans and selling them to the Fed. So far only $530m has been lent under the scheme. It may improve as banks and borrowers become more familiar with it but that might be too late for some of the companies that it is designed to help. The article suggests that 'making small business loans structurally more attractive for lenders through generous regulatory or tax breaks. That might result in more dud loans, but the economic benefits outweigh the risks.'

FT BIG READ. US ELECTION Republicans split over Trump’s legacy
The president is behind in the polls and some fear the party could lose the Senate in November. But even if Joe Biden wins, Donald Trump will remain a divisive presence in American politics.
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