Aug 7 FT Trump cracking down on China, Boashang to fold, US needs a 5G JP Morgan and more

11 Aug

Aug 7  FT Trump cracking down on China, Boashang to fold, US needs a 5G JP Morgan and more

MARKETs As at 2pm HK time
JAPAN opened lower despite good Household spending data pre market. It has trended lower into lunch.  Average cash earnings missed but Foreign Exchange Reserves, Coincident Index and Leading Economic index all beat. PM saw seen a small uptick but I think general caution ahead of the long weekend and tonights US data will keep it subdued.  Currently 0.8%%
S KOREA  markets opened higher Kosdaq initial sold down into the red, rebounded but couldn’t break above yesterday’s close. Retested support and then worked higher currently flat. Kospi initially rallied before trending lower, sold down into the red but the worked back to currently flat.
TAIWAN opened lower and has drifts lower through the day with caution ahead of the weekend currently -0.7%
CHINA opened lower and traded sideways for the first 30 mins then sold down ahead of the Trade data.  It was better than expected and prompted more selling into lunch; probably as it reduces he expectations of more stimulus.  PM saw initial selling down to 4,640 level but then bounced. Currently -1.6%
HONG KONG Opened -21pts @ 24,909  vs -109pts ADR's at 24,821 with Tencent +VE but other E-Commerce names weak. Cheung Kong names weak after earnings disappointed. PCCW strong. Market initially traded sideways around 24,800 level for 40 minutes but then sold down and traded around 24,500 level. Sold down to 24,170 after the China traded data.PM seeing the market work slightly higher currently -1.7% but T/O has increased significantly and is already pasted yesterdays total.  Tencent -4.6% but off lows after Trump said WeChat to be banned in US.
EUROPE Expect markets to open lower following Asia and with caution ahead of US jobs numbers
US Futures opened flat but then sold down expect a weak open ahead of jobs and wholesale inventories data.
EARNINGS Noble Energy, Virtu Financial, Berkshire Hathaway

China trade data much better than expected
Balance of Trade Jul $62.33b vs 46.42b Jun (F/cast was $41.9b)
Exports Jul +7.2% vs +0.5% Jun (F/cast was 1%)
Imports Jul -1.4% vs +2.7% Jun (F/cast was +1.5%
It was the fastest growth in exports in seven months, amid further improvement in global demand as more countries lifted COVID-19 lockdown restrictions. Demand for virus-related medical products, and electronic products, has helped China sell more products overseas.

Trump gives US groups 45 days to stop dealing with TikTok and WeChat; Tencent which owns WeChat has traded lower since the news came out.

Trump team outlines plan to crack down on US-listed Chinese groups. Proposal recommends delisting companies that do not meet American accounting standards. Key is the delisting of firms whose auditing is done by firms that cannot be reviewed by the US Public Company Accounting Oversight Board because of Chinese government restrictions. The alternative to delisting will be the appointment of a co-auditor whose is not subject to the same restrictions and so the audit could be reviewed.
The FT notes that 'The proposal also recommends enhanced disclosure requirements for China-based companies and funds exposed to China-based groups, requiring more due diligence on the behalf of index providers, and guidance for investment advisers.’ That could also hurt some Chinese companies but should be good news in the effort to protect investors.

Microsoft shifts focus to buying TikTok’s entire global operation.
Talks expended to include India and Europe. I makes sense to have the global platform to ensure cross border continuity. But the big issue will be separating TikTok from ByteDance especially the data and algorithms. I think a deal is likely but the timing of separating the operations could be a very draw out affair. Then it is a question of whether the franchise can survive in the meantime as competitors look to move into the space. Users of such Apps tend to be quite fickle.
People are also taking about the deal testing Microsoft’s ties with China. Whilst it hasn’t made a lot of money from China it has been a long term player and been successful at not upsetting Beijing which is no mean feat. For that reason it is an ideal partner for this deal.
Read also TikTok deal tests Microsoft’s bet on China Ties built over decades in second technology superpower strained by souring relations between Beijing and Washington

China allows regional lender Baoshang to fold. PBOC has announced the bankruptcy of regional lender Baoshang Bank the first for 20 years and authorised the liquidation, a year after it seized control of the institution. It previously didn’t allow such actions fearing it would undermine confidence in the banks. That they have changed course may reflect a greater confidence in the system and it will also serve as a warning to other banks not to let their bad debts grow unchecked. Baoshang bank was closely associated with the Tomorrow Group which was controlled by billionaire Xiao Jianhua who was escorted out of Hong Kong.
It is not expected that there will be more bank liquidations as Baoshang Bank seems Mohave been a rather unique case. Also Beijing has recommended the use of special bond issuance by local governments to firm up local lenders’ shaky balance sheets.
I think that the regional and local banks in China are still a risk to the financial system in China and that a lot more needs to be done to clear up the system. Hopefully these are signs of first steps in the right direction.

China’s yield premium fuels record foreign ownership of ‘standout’ debt. Looks at how foreign investors are being drawn to China’s domestic bond market thanks to the higher yields being offered. An interesting read and whilst the market is still dominated domestic investors with foreigners only holding around 2.4% of the market. Worth a read but for many investors the difficulty in getting access to the market and the additional risks involved probably explain why so few foreigners actually get involved.

UK central bank rethinks optimism on recovery from Covid crisis. BoE’s new forecast shows a faster initial rebound but then a slower pace to get to full recovery. It expects a slow Q3 as concerns about job security and health worry people. In the light of the new forecasts the bank said stimulus would not be withdrawn until the key items of falling unemployment and rising inflation had been achieved. On negative interest rates they commented that they are in the tool box but they have no intention of using them at the moment.
Not everyone agrees with the Bank’s expectation of a V shaped recovery and as such they expect policy makers will need to provide more stimulus.
Personally I doubt a straightforward V shaped recovery. There is likely to be a rebound but until we have a vaccine or cure I think people are going to be a lot more cautious on spending until they know the virus is under control and that jobs are secure again.

It was also worth noting that German factory orders saw a record rebound although they are still below pre-pandemic levels and this morning that Chinese exports were much stronger than expected. Key will be the detail in the exports which sectors are doing well and to what degree companies are re-stocking or just working to minimums. Also key will be the payments for the current orders and previous ones, many exporters in the fashion trade are suffering because previous orders were declined leaving them with unseasonable inventories that will be difficult to clear.

Pace of American jobless claims falls Applications at lowest rate since start of pandemic but still exceed 1m a week. Whilst the fall in claims is seen as good there are questions on the driver and the degree to which the ending of the special stimulus programmes has impact the numbers of new claims. Also the recent increase in covid cases in some states which has triggered further lockdowns and that is also likely to have an impact in the coming weeks.

Tumbling real rates boost assets from stocks to gold. Policymakers’ attachment to stimulus sparks fears that higher inflation lies ahead. Looks at how with Government bonds held to maturity likely to lose investors money how Gold and other precious metals that yield no incomes are looking attractive. I also think the use of Gold ETF’s is also a key factor. Being able to effectively hold real gold without actually needing to store it in a vault and being able to trade it so quickly has added to its appeal.
Interesting the note that Howard Marks said this week “Many investors have underestimated the impact of low yields on valuations,” The falling yields help explain the strong stock market recovery.
The article also notes that having provided so much stimulus and cheap money it will be difficult for the Fed and Government to remove it in the future. I think that is certainly true, after all we still haven’t unwind the first of the QE!
Looking forward the article notes that 'In the meantime, it also means that stock market valuation metrics themselves are likely to be acutely sensitive to shifts in inflation expectations — and lead to more volatility, according to Jordi Visser, chief investment officer of Weiss Multi-Strategy Advisers. “In a world with negative real rates, the booms and busts will be faster,” he said.’

Opinion America needs a modern-day JP Morgan to combat Huawei. Outlines how in order to get the most from 5G and all the technology that it will enable the US needs someone with the resources and foresight or fear of the alternatives to invest in 5G. It notes that many misunderstand the importance of 5G its not faster movies on your phone but 'the enhanced capacity will fundamentally change digital economic activity, leading to far greater efficiencies and innovation. When combined with more sophisticated artificial intelligence programmes, 5G could revolutionise medicine, manufacturing, finance, commerce and basic science.’
It notes that at present there aren’t any US 5G companies its Huawei, Ericsson and Nokia with little interest from US companies picking up the mantle. I would imagine because when they did invest in 3G they lost out big time. It was the platform operators not the infrastructure builders that made money; which suggests the method for paying for 5G will need to be reviewed. This problem is key. It likens it to the railroad Barrons whose investment radically changed the expansion of the US. 5G has the same potential but you have to be involved as Huawei is in the design and patenting of the new system. Again this is something China learnt from 3G when it tried to design its own system and expected the rest of the world to adopt it. It didn’t because its patents weren’t as dominant as the Wests. So it is seeing to set the standard and then the rest of the world will be forced to do it the Chinese way. Hence the urgency to find a 21 century JP Morgan in order to have change and not to find that the west is in the position that China found itself over 3G.
The article ends by saying
'At one point during the 1907 crisis, New York City was days away from bankruptcy. Morgan personally underwrote $30m in bonds to keep the city solvent. He was criticised later for creating a dominant “money trust”, but Morgan’s actions throughout October and November probably prevented a catastrophic failure. Without a similar act of self-interested patriotism, this may well be the last decade of America’s global ascendancy.’

For investors 5G will be a key area but at this stage there is a lot about the sector that is unknown. It is not unlike the days of video and beta, there are options but no one really knows which is going to be successful. What will be key is keeping abreast of developments.

LEX Toyota Motor: shock absorber. Looks at the results and is still +VE on Toyota as its well positioned to survive the pandemic; it made a profit and has a strong balance sheet. It’s a reliable investment which is what people want at the moment. Post pandemic when people are more interested in innovation might not be so good for Toyota but in the meantime its looking good.

Even in alliance, Apple’s rivals risk picking the wrong battles. Looks at how Apples rivals are getting better at countering the dominance of Apple but still have a long way to catch up and Apple is not waiting for them as it seeks to advance further. Here it is talking about the linking up of Microsoft and Samsung to facilitate the same ease of co-operation between devices that an iPhone and Mac can provide. Google is also looking to work with Samsung too. The companies will need to work closely as Apple pushes into first party services which the articles notes 'over time this will squeeze out many companies that have counted on using the iPhone to reach their own customers.’ Secondly is the growth in integration of products and the use of Apple’s own processors.
The ease of interconnection of Apple products is something its competitors need to address although it does question whether everyone wants that.
It also makes the point that in some areas Apple’s offering have not been great but it usually slowly makes improvements.
In summary the Ft says 'Apple’s rivals, by reaching for tighter technical — and business — links, may once again be doing the wrong thing. By trying to emulate Apple’s integration, without at the same time having the unitary control that Apple has over its technology universe, they may come up with a pale shadow of the experiences its technology makes possible. But as Apple inches closer to becoming the world’s first $2tn company, it’s not obvious what else they can try.’
For investors it demonstrates why Apple remains a good investment.

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