July 6 FT HK, Savings question, HSBC -VE Fed test? Taiwan, India, Pharma and more
MARKETS As at 12:15pmHK Time
JAPAN Opened higher and has traded higher through the session, Nikkei currently +1.5%
S KOREA Kosdaq and Kospi both opened higher in new stimulus package and have trended higher. Currently Kosdaq +0.8% and Kospi +1.4%
TAIWAN Opened higher and has worked higher Currently +1.4%
CHINA Opened higher and traded strongly higher CSI 300 currently +4.3%
HONG KONG Opened strongly higher (+172 pts (+0.7%) @ 25,546 on T/O of HK$2.15b) squeezing recent shorts. Pre Market Jun PMI 49.6 vs 43.9 May (F/cast was 48). Market have pushed higher breezing through 26,000 on huge T/O of HK$126bn at lunchtime. HSI +875pts (+3.5%)
EUROPE Expect the market to open higher following Asia and with US futures working higher.
US Futures opened flat as covid-19 cases continue to surge, but have risen. Dow was +14pts but now +358pts, S&P and NDX open flat but now strongly +VE
Market Questions. Cross asset Brexit talks put pound back in spotlight as investors debate gold price and Hong Kong. I’ll cover this first only because I’m quoted in the Where next for Hong Kong’s stock market?
Will EU talks improve the pound’s prospects? Mixed views as the deadline for a deal draws closer. BoA think headwinds are mounting and MUFG Bank think a deal more likely outperformance is possible. I don’t have a strong view on sterling.
Will gold continue its rise towards $1,800 an ounce? Again mixed views but having gained nearly 16% YTD many think that it will see profit taking. But it points out that share sales by Harmony Gold and Polyus Gold went well and Gold ETF’s are still seeing good interest. I think it goes higher through the year as more people become aware of the risk of inflation due to the huge stimulus packages that we have seen.
Where next for Hong Kong’s stock market? Notes the rally last week which it suggest that traders have ’shrugged off’ the new national security law and worries about Hong Kong’s day’s being numbered. A number of houses have actually raise their full year targets for the HSI. It also notes the HSI has benefited from US/China tensions with a number of secondary listings in HK which moves the market from its historical banks and property to ecommerce.
I’m quoted “As the index moves more to ecommerce, Covid-19 will be less of a drag and more of a boost for Hong Kong,” said Andrew Sullivan, a stock broker in the city.
I would just like to add that with regard to the rally since Thursday, the first day of trading under the new law I think it has been largely 'Team China’ driven. The huge volume even on Friday when US market were closed and this morning ahead of the US re-opening suggests that. Tomorrow is likely to see it continue as US investors play catch up. For the HSI above 25,500 level is important because that was the support last year during the protests. To hold the market above there; China can say the new law is doing ‘good’ for Hong Kong. I would caution because we have yet to the see the detailed response yet from Trump. If it remains the proposed sanctions on individuals then it will have little impact. But if Trump decides he needs to show strength then having pressurised Chinese companies to delist from the US he could put pressure on US investment and pension money not to buy them in Hong Kong or elsewhere as he did with the Federal money. He could do a ZTE make the call and then roll it back but the impact would be to see a significant pull back for Hong Kong and shot across the bows for China.
Worth noting ZTE in HK took 18 mths to recover after Trump rolled back the ban.
On the US delisting Chinese companies; I mentioned in my Macro Note this morning Peterson Institute for International Economics says delisting Chinese companies is pointless. It points out the delisting then is pointless because US investors can still buy then in Hong Kong and via the private equity market and so the action will not hurt their growth or China’s. It notes that there are 230 Chinese companies listed in the US and that private equity companies have be actively buying out a number of these companies. It also notes that a number of US companies have been increasing their exposure to China; like GS and MS via securities ventures and Amex via a JV. It is some thing I have said for a while BUT what the report does not consider is Trump further weaponising US pension money as he has done with the Federal pension money. There he only put pressure on them not to invest in Chinese companies that were not allowed to operate in the US. But if he went further, and banned US pension and investment money in buying them in Hong Kong that would be devastating for China. Even if he only banned new investment money that would have huge repercussions for China. The question that Trump will ask himself, I think is what does this do for my re-election hopes. Will that money then be re-invested in the US and help the US markets move higher? Can he spin it that money invested in China is taking away US investment and jobs. Further weaponising of the USD via pension money is the next logical step for Trump I think.
Also worth noting in the SCMP over the weekend Time for China to decouple the yuan from US dollar, former diplomat urges, says US will pose ‘increasingly severe threat’ to future Chinese development through dollar’s global monopoly. Preparations for gradual decoupling and internationalisation of the yuan should begin ‘now’. Follows the Hong Kong Autonomy Act, passed by Congress last week, requires the administration to punish foreign banks if they continue to do business with sanctioned officials, including possibly denying them access to the global US dollar payment system.
High saving rates pose dilemma for central banks Consumers’ pandemic cash stash will help drive economic recovery or hold back growth.
Economists and investors are trying to work out whether the rise in savings rate is pent up demand that will be spent as soon as the consumers feel it is safe enough to go back out and spend it (involuntary saving) or people building a safety net (precautionary saving). The reality is probably a bit of both in my view and dependant on factors as conceived job security, previously level of savings, age, fitness. For the Central Banks and governments it is more of a problem as they try and gauge what is needed for a recovery. As the article says 'If consumers rush back to the shops, extra government stimulus threatens to generate too much spending and inflation; but if they hoard their incomes, too little stimulus threatens a vicious circle of weak expenditure, slower recovery and higher unemployment.’ ECB sees the savings build as a reason to caution that the recovery will be slow. BoE sees it the other way. Many expect the net result to be a rise in inflation. So far France and Germany have seen a significant increase in spending as lock downs have eased but I would say it is to early to determine a trend and that there are a lot of potential hurdles to overcome not least how long furloughs last and how much re-hiring occurs. The employment numbers from the US last week, in my view, so no clear and certain path. Key will be for the central banks to be vigilant and data dependant. However based on how much stimulus has already been pumped into the system I do expect inflation.
UK set to phase Huawei out of 5G following security inquiry The expectation is that Huawei will be phased out from the UK 5G network as US sanctions on Huawei cast doubts on its ability to supply the British market, primarily in the semiconductors needed. Importantly though this will probably only apply to new equipment and not mean taking out existing equipment. Still a -VE for Huawei.
Fed stress tests predict European bank losses Key here for Asian investors will be the impact on HSBC which along with and Bank Santander are expected to have the biggest losses. It will be interesting to see how HSBC reacts as it already looking at a significant remodelling of its business. Short term I would expect this to be another -VE for the HSBC share price. The stock is up today thanks to Team China driving the HSI higher but the stock in languishing around its face year lows with little reason for investor interest.
Taiwan eyes exodus from Hong Kong with disquiet Taipei opens office to assist exiles fleeing security law but fears move will enrage Beijing.
Interviews Mr Lam owner of Causeway Books who was himself kidnapped by Chinese Security agents before they were allowed to operate freely in Hong Kong a they are now, for selling politically sensitive books. Ones, for example, that portrayed President Xi and his family as having benefited from being in power. Mr Lam thinks it is game over for Hong Kong and that more and more Hong Kong people will leave. He is setting up Haven Assistance; a network to help those that do build a new home in exile.
Whilst many Taiwanese have sympathy for Hong Kong they are also wary of upsetting Beijing, and rightly so as Beijing has said it will invade Taiwan and make it part off China.
The article notes that many have already sought refuge in Taiwan. A survey of Hong Kongers considering emigration showed 35.5% would like to move to Taiwan, making it the favourite destination. Last year 5,858 HK people became Taiwanese residents last year. So far this year applications have doubled despite Tawian closing its borders.
The Taiwanese government has expressed sympathy but no to the extent of putting a refugee or asylum law in place but it has opened a special office to provide assistance.
With lower salaries and higher taxes it is likely to appeal more to young people, although with a leading Tech sector engineers and others are likely to find good job offers. Affluent Hong Kongers have a number of other alternatives already in my view.
The article notes that 'The Chinese government’s Taiwan Affairs Office has decried Taipei’s pledge of assistance for Hong Kongers in exile as a “separatist plot” based on a “confluence of ‘Taiwan independence’ and ‘Hong Kong independence’”.’
I still think the International Community should be making it very clear that Taiwan is its own country and that any action against Taiwan will not be tolerated. Longer term it illustrates that Hong Kong is going to see a drain of people leaving; my expectation would be the the well educated that are disappointed will be amongst the first to leave further undermining Hong Kong’s ability to remain a top international financial centre.
Insurance disruptors battle to hit the big time Groups such as Lemonade are winning over investors but consumers have yet to follow.
Worth reading because Lemonade is that one of its backers is Softbank. Others are a number of VC’s and Ballie Gifford.
It’s ‘edge’ is that it is 'aiming to shake up home insurance with promises to use artificial intelligence to settle claims quickly and a business model designed to ensure charities receive some of the benefit when customer payouts are low.’
It’s not the only insurance start up out there looking to disrupt, its still loss making and it has yet to gain significant market share but worth watching the sector, with enough small start up looking to disrupt the question will be whether they can or not and if they can do they get bought out by the established players.
India faces ‘major challenge’ to launch recovery, says Moody’s. Looks at how difficult it will be for India because social distancing is so difficult. It notes that 'the pandemic had exacerbated the challenges India was facing and highlighted the deep stress in the country’s financial sector, which risked weighing down on growth in the longer term.
A high burden of non-performing loans had strained asset quality at financial groups, leading to a series of collapses at lenders. The ensuing credit crunch has made it difficult for many Indian companies to raise funds.
Mr Modi in May announced a stimulus package equivalent to $266bn, or 10 per cent of gross domestic product, aimed at reviving the economy.’
‘Sabre rattling’ delays $100m China boost for India’s Zomato The delivery group awaits access to $100m of the $150m Ant funds it secured but the remaining cash is subject to Delhi approval rules. Shows how the border clash has impacted not just Chinese firms but Indian firms with Chinese backing. Last week Zomato employees burnt their T shirts in protest against China for the border clash and the Chinese backers of the company. Ant has invested nearly $560m and has a 25%+ in the company. Zomato’s main competitor is Swiggy backed by Tencent and Meituan-Dianping. It is a tightrope for the government balancing public opinion against investment but whist many think total disengagement with China at present is not possible; politicians will strong out the opportunity to their advantage. For the Chinese investors no doubt they are in the position like the rest of the world has been to China. They can see a highly lucrative market opportunity at a time when their domestic market is looking saturated and highly competitive but the government is now in the way. Smaller start ups may look elsewhere but they large players know a good market when they see it and will be looking to see how it can be accessed.
Koike wins landslide second term as governor of Tokyo. As most expected having handled the covid-19 crisis well. It means her place in national politics is assured as it keeps alive her potential to run for Prime Minister. Last time she suffered a heavy defeat having set up herown party after defecting from the LDP. I would imagine having leant the lessons from that attempt this time will be more focused.
Pharma industry takes its shot at redemption As the threat of price reform recedes, drugmakers have seized on the pandemic as a chance to rebuild their reputation.
Key going forward for investors will be which one gets a vaccine of cure first. Then will come the pricing of the course of treatments along with how it is going to be distributes and who will get the first treatments. The outlook for the sector is better but still tough. Also read Australia’s CSL warns of vaccine rush
Toshiba clash with activist tests security law I covered this is my morning Macro note if you missed it
Toshiba and Effissimo (a secretive Singapore-based activist fund) could be a test case of Japan’s new national security law on foreign investment. The row is over Effissim’s (Toshiba’s largest shareholder with a 15% cent stake) proposal to have its founder on the board of Toshiba. Last month Toshiba rejected Effissimo’s request to add its founder and two other non-executives to the board. Effissimo said it wanted to changes to strengthen compliance after recent financial irregularities at one of Toshiba’s second tier subsidiaries. Toshiba was demoted in 2015 to the secondary board for five years after an accounting scandal, so it is currently able to re-apply. Toshiba has said the the board had “no intention of clashing with our shareholders” and that it has an “extremely progressive” and balanced board. It seems as often with Japan those are only words. -VE
Marshall Wace targets $1bn for ESG hedge fund was in the FT Weekend note I sent out
Plans show firms warming to environmental, social and governance factors. Whilst not an ESG fund it will focus on 'how companies address environmental, social and governance issues. The new fund will buy stocks with strong ESG characteristics and bet against stocks with poor ratings.’
It will depart of the TOPs programme; where sell side analysts make recommendations and are paid on how well they perform; constant under performance or not making changes usually results in contributors being asked to leave. The key to the TOPs system for the Sell side is being quick to cut under performers and make early calls on potential winners. Marshall Wace, by monitoring the good calls (be it to buy sell or cut) are able to identify market trends. There are a number of other similar systems in the market too. It also notes that Caxton and Man Group are looking at ways to identify stocks with good ESG traits to outperform.
Other funds looking to raise funds mentioned in the article are DE Shaw and Baupost.
FTfm Don’t bet on the silver boom The industrial metal will not be dragged up by gold. Outlines the fundamental differences between Gold and Silver and hence does not expect Silver to do as well as gold. Key being the there is a lot of silver that has been already mined and stored as bullion or artefacts that could be easily melted down. He does make the point that there is rising interest in nickel, copper and cobalt, much of it in connection with electric vehicles and their need of batteries. For me I believe that Gold is setting up to push to US$1,900 because I do believe inflation is coming as a result of all the central bank/government stimulus. Because of the amount of cash in the system and I think governments will need inflation to bring government debt levels down.
Opinion The UK should bar Huawei from its 5G network John Sawers. Worth a read because he is a former chief of MI6.
In his opinion China is overplaying its hand and forcing the West to stand up to China.
He notes the UK was to allow Huawei to have a part in the UK 5G network mainly due to testing and the fact it used reliable suppliers like TSMC for key equipment. But that has changed and hence the UK decision should change. He then asks will the UK also set out a new policy on wider Chinese investment in the UK? He doubts they have the bandwidth at present but expects one will come in time.
He calls for 'all western democracies now unite in standing firm against China’s more aggressive approach. Beijing’s arrogant “wolf-warrior” diplomacy surrounding the Covid-19 outbreak might have been manageable on its own. But to that must be added a series of other recent actions.’ Such as Canberra’s request for an independent investigation into the source of covid-19, the sinking of a Vietnamese fishing boat, militarisation of island having said it wouldn’t, the border clash with India and most recently the new law for Hong Kong. He also mentioned Tibet and Xinjiang and highlights the threat to Taiwan.
He thinks that over the years Beijing has become skilled in playing off Western governments to get what it wants noting 'within the EU there was no attempt at solidarity when a country was put in the deep freeze for supporting human rights defenders in China or meeting the Dalai Lama.’
He thinks that is changing and notes that no one wants China as an enemy but that China needs to engage on a common basis and not impose their standards and systems on others but only by a common approach from China’s economic partners will that be achieved.
Well worth a read. But on that basis the west should not seek to impose their standards on China? A good read I do think there needs to be a united approach. Maybe one day we will achieve the utopia set out in Star Trek of being a world of federated states; we can hope.
Opinion Ad boycotts alone will not curb Big Tech Starts by asking 'Will social justice lead to economic justice?’ It finishes with 'The final tailwind to Big Tech’s economic power has been tax policy. None of Democratic presumptive nominee Joe Biden’s proposals would increase taxes on the tech sector specifically, as the UK and some European countries have proposed. Yet it is thanks to relatively low tax rates that Big Tech keeps a chunk of its corporate profits. If we want real economic justice, I suspect we will need a digital dividend tax too. Corporate boycotts make a political statement. It will take more than that to have an impact on Silicon Valley’s bottom'
FT BIG READ. THE NEW SOCIAL CONTRACT ‘We must think as citizens’
FT Series Covid-19 could transform many western societies by demonstrating the need for competent government. But without a thriving and stable middle class, the state risks succumbing to plutocracy.
Starts by quoting Arisotle “It is clear then that the best partnership in a state is the one which operates through the middle people, and also that those states in which the middle element is large, and stronger if possible than the other two together, or at any rate stronger than either of them alone, have every chance of having a well-run constitution.”
Looks at what has happened since the end of WWII which it puts into two periods with two interregnums.
First 1945 to 1970, was the era of a “social democratic” or, as Americans might say, a “New Deal” consensus. The second, 1980, was that of the “global free market”, or the “Thatcher-Reagan consensus”.
The two interregnums: the high-inflation 1970s and now we are living in what seems to be another interregnum, which began with the global financial crisis which damaged the ideology of the free market. But, across the western world, valiant attempts were made to restore the ancien régime, through the rescue of the financial system, tighter financial regulation and fiscal austerity. An interesting read looks at
Anger and despair at the system
Changes for the workforce
Impact of the pandemic
A new civic context
'How precisely such aims might be achieved is what politics must be about. But this does not mean going back to the 1960s. The world has changed too profoundly and in most ways for the better.
We are not going back to a world of mass industrialisation, where most educated women did not work, where there were clear ethnic and racial hierarchies and where western countries dominated. Moreover, we face, with climate change, the rise of China and the transformation of work by information technology, very different challenges.
Yet some things remain the same. Human beings must act collectively as well as individually. Acting together, within a democracy, means acting and thinking as citizens. If we do not do so, democracy will fail. It is our generation’s duty to ensure it does not.'