July 31 FT. Recovery questions? HK Elections, StandChart, China Cold War? And more


04 Aug

July 31 FT. Recovery questions? HK Elections, StandChart, China Cold War? And more

MARKETs at 1:30pm HK time
JAPAN opened lower despite good Marco data on unemployment and industrial production. It sold down on rising covid concerns and in thePM is drifting lower/sideways Currently -2.4%
S KOREA opened higher on good retail, industrial and manufacturing data.  Kosdaq has opened higher, sold down rebounded sold down to day low and now working better currently +0.4%.  The Kospi initially sold down but rebounding and trading sideways just below flat currently -0.2%.
TAIWAN opened lower but rebounded to flat but sold down again and now working higher  currently -0.5%
CHINA opened higher and rallied to day high as PMI data was slightly better but then sold down into lunch. PM market trading sideways  Currently +0.4%
HONG KONG Opened higher despite ADR’s indicating lower rallied ahead of China PMI data. Unable to break higher and sold down to day low around 11am (24,530 level) before rebounding into the lunch.  PM seeing selling pressure Currently -0.1%
EUROPE Expect markets to open flat following good US earnings but with covid concerns still evident.
US Futures opened strongly expect a positive open but earnings and covid remain in focus


Plunge in US and German output signals gruelling road to recovery.  Record 10% contractions in GDP • Bond markets rally • Covid flare-ups imperil rebound
The key for me is that it seems to make the prospect of a V shaped recover less likely. Plus the fact that we are seeing a resurgence in cases is a cause for worry. Worth also reading Fed in dovish mood as it hopes for best and plans for worst. Which again underlines the fact the the FOMC and other Central Banks remain very cautious about a speedy recovery; as he said it “depend significantly on the course of the virus”.

Hong Kong bars campaigner from elections. The article looks at the disqualification of Joshua Wong from standing in the forthcoming local elections (unless they are postponed) under the New Security Law. He was not the only one. So far 11 others have also been disqualified and the administration has said there could be more. It also notes that four students (including a teenager) were arrested by the police on Wednesday for forming a group to advocate Hong Kong independence on social media.
Whilst Joshua Wong is well know the administration also barred some members of the Civic party who are known to be more moderate. The reality is that the local elections are not going to be a vote of free expression as Beijing seeks to influence the outcome already.

StanChart warns over Hong Kong tension. Lender highlights dispute between US and China as bad loan provisions triple. Not as badly positioned as HSBC but facing the same struggles with the threat of reprisals from both China and the US.
Interestingly Bill Winters mentioned the massive inflows of capital into the City in Q2 but allude to where it had gone from. The bank mentioned it was seeking legal opinions on how to manage compliance and taking advice from the Hong Kong Monetary Authority.
I don’t think I have every heard of that happening before to such an established bank but it highlights how unusual the situation is.
See LEX Standard Chartered: a Winters’ toil. Notes that Mr Winters is doing well but still needs to cut costs to close the gap with HSBC

Opinion A cold war does not answer China’s challenge Notes that we use history to try and answer the present. A while ago US/China rivalry summed up using Thucydides prediction of the inevitable conflict between an established hegemon and rising power. Now its being likened to the era of soviet stand off . The writers point is that none of that is particularly useful. He looks at Mike Pompeo’s recent speech “Communist China and the Free World’s Future”, and looks at the background of Nixon’s opening China. In that he focuses on George Kennan the the US diplomat who set the framework for America’s cold war policy of Soviet “containment” and the real reason for Nixon opening China which was to isolate the Soviets.
Today the writer says China’s ambitions are not the same as the Soviet ones were. He doesn’t think it is about competing systems but competing states. He doesn’t think that Beijing is seeking to defeat capitalism across the world. Where the Soviets sought to crush capitalism China he thinks depends on it.
He notes that 'Mr Trump and Mr Pompeo, however, are seemingly ignorant of the most important piece of advice in Kennan’s dispatch from Moscow. As vital as it was that the west resisted any Soviet advance, the answer was not provocation or war but to ensure “the health and vigour of our own society”.
Kennan’s last sentence might have been written specifically for Mr Trump: “The greatest danger that can befall us in coping with this problem of Soviet communism, is that we shall allow ourselves to become like those with whom we are coping.”It is an interesting read but I think he is wrong if he thinks that China is not seeking to defeat capitalism. It will happily take advantage of capitalism along to road to achieving its goal which is the demonstration that only communism, as defined by the party leaders ie Mr Xi, is the way.

Samsung eyes recovery in device demand. Expects a good 2H to follow the good results announced yesterday. Worth noting that the high levels of automation at its memory chip factories meant little disruption during the pandemic. I would expect to see robotic companies see improved business as many companies come to realise the benefits. But for Samsung the key will be new smartphone launches which are expected to keep DRAM demand high. It will be interesting to see whether demand for new phones remains resilient if lockdowns continue. The article notes that analysts are also expecting this with the launch of a foldable phone and Galaxy Note flagship phone along with cheaper models. Some also think that is will benefit from the US/China tension as the US puts more pressure on Huawei. I think the likes of Samsung will continue to do well thanks to its diversified range of offerings.

Air travel sector struggles to take off again. Aviation industry battles to restore confidence that flying is not as risky as it may seem. Looks at the pro’s and con’s. Key is that there is not much real data but some good indicators. But I don’t think its going to make much difference in the foreseeable future. Worth a read.

Alcohol volume AB InBev celebrates better sales as beer lubricates easing of lockdowns. Better than expected but still wary of a resurgence in lockdowns and social distancing measures.
See Lex AB InBev: half cut 'Filling up the drinks cabinet and ripping out costs proved a decent strategy for 3G, the Brazilian investor trio. But it has left a big tab behind the bar. Net debt as of end-June stood at $87.4bn. AB InBev spent more than $1bn on finance costs in the quarter.
Depressed volumes stymie the underpinning strategy of operational leverage. AB InBev’s cost of sales per hectolitre rose 15 per cent over the period. Its robust margins — the sine qua non of 3G’s strategy — shrank 825 basis points to 33.2 per cent on the basis of normalised ebitda.
Reducing the net debt/normalised ebitda ratio to the targeted 2 times looks an ever bigger stretch with the end-June multiple standing at 4.86 times. Last year’s dividend cut is unlikely to be the last.'

Investors drive surge in gold price as lockdown squeezes jewellery industry. Notes that data released by the World Gold Council yesterday showed global jewellery demand almost halved in the six months to June, -46% YoY to 572 tonnes. But demand for gold from ETF’s was +734 tonnes. Gold was a little weaker overnight but with all the unknowns about covid and the timing of a vaccine or cure I think Gold will continue to move higher.

Big Tech bosses squirm at antitrust inquisition. Silicon Valley titans accused of throwing their weight around in pursuit of market dominance and then putting up fortifications. Also Blows from Congress did not build a case against Big Tech Whilst there was side points scored its going to be a long battle with no easy answers but at least the dialogue has started. Some interesting admissions came to light and I am sure that there are a lot more out there they the big tech bosses hope remain hidden. Also read the editorial Digital ‘gatekeepers’ face a moment of reckoning
American antitrust laws are no longer adequate for the online era. And also Avoiding a bloodbath on the UK high street A shake-up of how retailers are taxed is long overdue.
The reality is that business has transformed but taxes haven’t really changed at all. No one wants to overhaul the tax system because it is a huge undertaking and there are loads of nuances and loopholes and vested groups. But maybe the pandemic is the right time to start?

For interest
Pandemic has led to tipping point in understanding risk. Sets out that we need to update our assessment and definition of risk. Risk going forward will need to be ‘multidimensional’ it is suggested. Referenced to government bonds will also need to be reviewed as with negative interest rates due to central bank asset purchase programmes distort the risk free rate and distort allocation of credit and solvency issues. Regulatory changes, ESG, covenant variances and even social intolerance are all becoming issues of more importance.
As she says
'Companies that do not pursue sustainable practices on a day-to-day basis are creating real operational and reputational risks — at a time when new regulations can make or break entire industries.
That is why active risk management is vital to delivering consistent returns. By understanding and targeting risk in a measured and informed way, investors are building the foundation of future value creation.'

Private equity has a taste of its own medicine. Notes how buyout groups such as Apollo are complaining in court about aggressive tactics from other creditors in debt battles. In most cases those tactics are ones that groups such as Apollo have used!

Building back better’ requires systemic shifts. Looks the situation in the UK. 'We face systemic challenges. Is this the crisis that will finally trigger real changes — as the 2008 financial one did not? The public appetite seems to be there, as reflected in political upheavals in many countries. The challenge for policymakers talking about building back better is to make sure they mean it.'

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