FT 2 June Netease +VE HKEX, CS in China, BEA & Elliott, HK vigils, China's worries over US riots
Markets opened higher but have largely traded sideways/higher Japan opened higher and trade higher on hopes of more stimulus as parliament debates a second extra budget.
S Korea’s working higher on the “New Deal’ stimulus plan announced Monday
Taiwan has tracked slightly lower from its initial open but remains above the key 11,000 level
HK Opened slightly higher but sold down slightly in the morning but now seeing a small recovery. Investors remain cautious.
China choppy trading but working higher
Europe opening higher and with Germany looking to play catch up having been closed Monday (with a number of smaller markets).
US Futures opened lower with concerns over the social unrest.
NetEase seeks Nasdaq buffer with $3bn HK offering Looks at the start of its HK secondary listing IPO today; which is expected to raise $2.6bn to $3bn. Part the reason for the secondary listing is the worry that the US will impose more restrictions on Chinese companies listed in the US. It also mentions JD.Com and Baidu who are looking to follow a similar path. But I still worry that if Trump succeeds in getting them de-listed in the US in order to protect US investors, is he seriously going to allow US investors then to invest in them in Hong Kong? Especially as he is removing Hong Kong’s special status with the US. That to me would be a pointless and laughable outcome.
Short term good for HK Exchange as it continues to raise its profile; stock is at a twelve month high and could test its 2018 high shortly (HK$297:40). If it break above there; it's in blue sky territory. But there are risks, not least the current local protests and the potential US sanctions and Chinese retaliations.
Read also LEX Hong Kong/NetEase: exodus zone who is slightly negative on the secondary listing and Opinion Delisting Chinese companies plays straight into their hands which looks at the how forcing Chinese companies listed in the US to delist will not be good for those currently invested in them.
Credit Suisse wins control over Chinese joint venture. Which was the troubled Founder Group conglomerate. Worth noting that Credit Suisse (CS) shares were -4% on the news. It joins a number of other banks taking advantage of the opening of the Chinese financial system after many years of ‘go slow’ by the Chinese. It gives CS more ability to compete on its terms with GS and UBS and distances it from the legal battle being played out at Founder Group. But it also comes at a time when US policy towards China could see further weaponisation of the US dollar financial system. It is surely not by accident that China is welcoming financial firms into China at a time of rising tensions with the US and others. In part it must hope that with these companies operating within China their government are unlikely to take action against China that would hurt such investments? I remain cautious on that one.
Elliott nears victory in Bank of East Asia fight. Looks at the ongoing battle for control. I think the title a little misleading as the decision date for the review has been pushed back from June to September due to covid-19. A key quote from the article 'People familiar with BEA have said Mr Li, who remains executive chairman of the bank, was adamant about retaining control over the family business but that his sons have become more open to a sale after several years of facing off with Elliott.’
Shake-up in way we work, talk and eat prompts agile bosses to shift gear fast. Businesses are finding ways of seizing opportunities presented by curbs on daily activities. Looks at a number of businesses that have adapted quickly to the changes and mentions Asia’s Nissin the Japanese noodle group +VE
Hang Seng in best day for two months after Sino-US frictions are brushed off. Looks at Monday’s trading. It was a good day but mainly because of short covering after Trump’s announcement on measure against China over Hong Kong were less harsh than anyone expected. Hong Kong, I think is still in a precarious position and the risk of collateral damage remains high as the US and China face off against each other. Both leaders will be more concerned about the domestic consumption of whatever happens that about what actually happens to Hong Kong.
China’s stimulus sceptics need not fear side-effects this time Was in the online FT yesterday but here my piece again in case you missed it
Sets out that the country faces a different and more urgent challenge to the one it faced in 2008; written by the Vice President of JD.com and Chief economist of JD Digits. Compares what happen in 2008 and the current position; thinks that the current phobia against final policy is misplaced. There were some painful legacies of the spending but the alternative would have been worse. Today is a very different situation and calls for even greater urgency than was the case in 2008. Not mentioned but obviously the scope for undertaking the same type of infrastructure spending has gone; the roads, bridges and railways have been built and so value adding alternatives have to be found. Ne notes that Beijing has vowed to target six priorities 'employment, basic livelihood, companies, food and energy security, stable supply chains and smooth operation of government.’ But to project jobs at the SME’s would require a similar plan to the US’s Paycheck protection programme and as yet not such plan has been suggested only tax cuts.
He sets out that China has lots of scope for more stimulus having outlined so little so far. But I wonder if that is true, we don’t know how much money China has really spent on Belt and Road, which was in itself supposed to be a great driver for commerce but in the last year has seen some notable set backs.
He expects the new spending to be targeted at things like data cents, new industrial centres with AI and cold chain logistics; which could be the drivers for the next decade in his view; key is well researched, structured spending.
Key remains fiscal action; that is the same the world over, monetary policy has limited scope now; although China does have more scope than most. Other items mentioned in the final paragraph are rural land reform and opening up the financial sector.
Investors pounce on aluminium storage trade as spot price tumbles. Worth a read, whilst I don’t trade commodities this looks like being very popular are relatively safe and without the risks associated with oil because aluminium is easy to store and future demand is almost assured as lock-downs ease because the metal is used in such a variety of processes.
Front page has Hong Kong accused of using lockdown to ban Tiananmen vigil and stifle dissent. As many had expected the police have refused permission for the annual vigil to commemorate when the Chinese Communist Party sent in troops to kill its own Chinese citizens who had mounted a demonstration in Beijing's Tiananmen Square. The Hong Kong police have cited the fact that the covid-19 restrictions enacted by the government are still in force. 'The Hong Kong Alliance in Support of Patriotic Democratic Movements in China, which organises the Tiananmen vigil, said the health crisis was an excuse to block the event at a time when Beijing wanted to assert its authority.’
It will be interesting to see how many people across Hong Kong either join the on-line vigil or hold candle light vigil in groups of no more that eight across Hong Kong.
Swiss choice on tougher ethics rules puts companies on edge. Looks at how Switzerland may make companies legal liable and guilty until proven innocent for abuses of human and environmental rights anywhere in their supply chains around the world; whether at subsidiaries or third-party companies. As one can imagine MP’s are having trouble agreeing on the issue. Companies will be watching the result very carefully not least because a large number of multinationals are based there. The article mentions; Nestlé, Roche, Glencore, Credit Suisse, Richemont and Syngenta. The vote comes before the end of June, watch for more details.
Metals prove a bright spot in M&A gloom Flurry of deals as bigger producers seek to prepare for life after pandemic. Looks at the surge in M&A amongst the gold miners but also notes opportunities in the battery materials fields like copper, nickel, lithium and cobalt, all linked to the growth in Electric vehicles. But due diligence remains an issue with travel lock downs in place. Also notes that most of the deals are between the smaller players because the large groups are not in distress and in some sectors like iron ore and the outlook from say the Australian player is looking good post pandemic especially whilst their major competitor Brazil is hurting due to covid-19.
America’s inequalities burst into the open in worst uprisings for 50 years. Violent events and protests force US to confront racial divisions and police brutality. Looks at the background to what is described as the worst civil uprisings in the US for 50 years. The fact that the police are under such pressure and the fact that some within the police forces are condemning the actions seen. Whilst China may attack the US over the use of force in trying to contain the riots (read China mocks Trump over response to unrest) the party will only be too aware that the social unrest seen in the US is potentially possible in China if the party is not successful in restarting the economy and ensuring ordinary people have jobs. China’s security services, police and paramilitary police and armed forces could easily be accused of similar actions by the ordinary people. It is not surprising that Preimier Li stressed jobs at the NPC last week.
It is also worth noting that whilst a few people involved in the Hong Kong protests broke some glass windows and attached some premises the scale of the protest was by any comparison peaceful. They were at no stage close to a ‘riot' and it will be interesting to see whether the Hong Kong prosecution service reviews its stance on those charges or how the judges, now clearly presented with what real riots look like, will react when judging those accused of rioting. It is also notable that in the US there was no attempt to ban the protests in advance. Everyone had the right to freely express their opinion over how the police had treated George Floyd. As the article China mocks Trump over response to unrest notes there is an irony that Beijing and its diplomats use media outlets like Twitter to condemn others whilst banning media like Twitter in China, barring its citizens free access to the internet and heavily censoring its own social media.
I still think that Beijing will be seriously worried that the US experience could represent pent up frustrations about social injustice that has been made worse by the covid-19 lockdowns. The recent crack down in China on citizen reporters who seen to suggest that they are seeking to use suppression to ensure it doesn’t erupt as it has in the US. Time will tell if that is going to work.
Read also A rust-belt revival in reverse Unemployment has soared in cities such as Detroit, which faces protests against police brutality. The social and economic problems stirring since the Covid-19 outbreak threaten the progress of recent years. A compare that to the situation in a number of the older Chinese cities where the SOE industry is no longer required or being forced to close due to pollution and you realise why Beijing is worried about what is happening in the US. For its modern cities with the emphasis on high tech and clean living they can be confident but in China’s rust belt officials should be concerned.
Detentions alert Hong Kong to legal trap. Activists fear new laws will let Beijing suppress opposition in territory as it has on mainland. Illustrates how Beijing has used its national security laws within China and why Hong Kong citizens might need to be worried; mainly because of the vagaries over defining what it covers. It also notes that the law was revised in 2012 when President Xi took control. Significant because of the length time between when Hong Kong’s basic law was written and what was going on in China then and the current situation. The article looks at the cases of Yu Wensheng, Ilham Tohti, Li Ming-the, Huang Qi and Michael Kovrig and Michael Spavor. The last two are compared to the treatment in Canada of Ms Meng; noting that whilst she has been granted bail and is living under surveillance in one of her Vancouver homes, with full access to legal representation, the internet and telephone; the two Canadians are being held in solitary confinement with limited consular access. Sombre reading.
LEX US banks: sanity check Looks at the current underperformance from the sector; which it feels is linked to market worries over pending loan losses and weak margins with interest rates close to zero. In the past dividends and buyback have been drivers. Lex thinks that when we see the bank shares start to snap back can be the assured that optimism in the recovery is warranted.
Rock-bottom rates pose a paradoxical risk to liquidity. A good read. I don’t know a lot about money markets but the article looks at money market funds and asks whether they still have a roll to play. Suggests that some feel it's not just about absolute returns but next best alternatives. It’s also about their flexibility which is important for businesses and it note here especially banks. They can raise money quickly, and the article says 'to make trades on behalf of large clients.’ Which raises the question in my mind as to why the large client doesn’t have its own money to make the trade? Or raise the money itself to make the trade. Are the US banks effectively raising their trading revenues by creating trades for clients? That sound very close to proprietary trading but rather than using the banks own money it's using borrowed money. What could go wrong with that?
Women-led hedge funds beat male rivals in Covid-19 crisis Out-performance attributed to approach to risk in industry still battling gender imbalance. An interesting read in many aspects but I still think reviewing performance on the basis of one quarter is meaningless. Funds are designed with five or ten year returns in mind. The fixation on short term performance I think will inevitably undermine the reason for the investment.
The junk bond nightmare of hair roots and split ends. The finals paragraph sums it up well; 'Currently, it is as hard to invest in a portfolio of junk-rated companies insulated from Covid-19 as to get on your reopened salon’s schedule — many such bonds trade above their redemption prices. Meanwhile, you can buy all the lower-rated energy names you want, cheap. Sally Beauty is one of the companies in the middle. Operationally, they have glimmers of hope, thanks to economic reopening. As for their bonds, they bestride a wide trading range emblematic of the tug of war between corporate cash burn and Fed-fuelled bond buying. Figuring out which will dominate takes the impossible: a pandemic crib-sheet and a White House inside track. Early in the pandemic, it was reasonable to wonder if the crisis would end leverage as we know it. Only a couple of months later, it is just as plausible for both companies and investors to believe that crisis-era central bank support is here to stay.'
I hope you enjoyed the read, feedback welcome.