FT 22 JUNE HK Security & Brain Drain, Huawei, Insurers, Banks , Apple and more


FT 22 JUNE  HK Security & Brain Drain, Huawei, Insurers, Banks , Apple and more

Markets in Asian opened flat or lower but generally worked better for most of the day but sold down into the close.
Europe opening lower and US Futures start -270pts but then recovered back into positive territory but have eased back recently.

Front Page
Tokyo weighs free office offer to Hong Kong bankers
. Tokyo is trying to benefit from the potential fallout of Fund Managers as a result of the New National Security Law being imposed on Hong Kong. The key sticking point is likely to be tax. Income tax in HK is a maximum of 17% vs 45% in Japan. I think that Singapore has a lot more chance of attracting Fund Managers.

Also read from FTfm Hong Kong fund chief denies ‘brain drain’ risk that’s Bruno Lee’s opinion and he is chair of the Hong Kong Investment Fund Association, he thinks this short term blip will not impact “the long-term strategic position of Hong Kong”.
Others are not so convinced. Whilst I agree with Mr Lee that we haven’t seen a move out of Hong Kong I am sure lots of contingency plans have been drawn up. Not only for the movement of staff but also of data servers to ensure confidentiality of data. I am also sure that as China has just charged two Canadian’s who had been held in solitary confinement for 18 months and rebased some basic information on the new National Security Law for Hong Kong that many plans are being brought forward. Key being the establishment of a Chinese office in Hong Kong that reports to Beijing. I would guess, that a lot of US executives, given option of being in Hong Kong or Singapore when the new law come into force most will choose Hong Kong. Not that they think they are targets but given the option would you take the risk?

Page 4
China plans security agency for Hong Kong. Beijing’s determination to press ahead puts it on a collision course with US. The article was out on-line Saturday night. Interestingly there hasn’t been more of a knee jerk reaction in the markets. I presume that investors are waiting to see what unfolds next from the US and Europe.

Does Beijing’s fresh virus outbreak threaten recovery? The answer is no but it does highlight that any recovery is not going be straightforward until we have a cure or a vaccine. It is not just in China but globally in my view. I still think hopes of a V shaped recovery are optimistic and the recent rise in new covid cases in the US and Germany illustrate the risks. I also think that as we are leaning more about covid-19 we should be more worried. Its ability to mutate and the fact that people who recover do not always have enough anti bodies to protect them from re-infection are points to be concerned over.
Read also from FTfm Investors reject prospect of an instant recovery Mispricing risk rises as markets disconnect from real economy. A CFA survey finds only 10% of a survey of 13,300 of its members expect a V shaped recovery. 44% expect a medium term hockey stick shaped which it says implies a two or three year stagnation (I guess that is at the playing angle of attack of the stick). 35% a U shaped. Only 4% predict long term stagnation.
96% are worried about asset mispricing risk with 'Liquidity dislocation (38 per cent) and distortion of natural market pricing because of government intervention (36 per cent) were cited as the chief reasons for asset mispricing risk.’
Also interestingly 'Some 84 per cent of those polled believe a review of exchange traded funds should be undertaken to determine the nature of their impact during the crisis.’
I do believe a lot of the excessive moves and volatility have been cause by herd like moves, probably by retail, into and out of ETF’s. Research on that would be useful.
On that point also worth reading Fund suspensions underline liquidity mismatches after market turmoil.

Also see Millions of jobs at risk when furlough ends Governments face difficult choices over winding down of public subsidy programmes. Looks at the situation in Europe but in fact its going to be true wherever governments have providing su[rt to keep staff employed. Makes the point it creates zombie jobs in sectors like' tourism, travel, hospitality, retail and entertainment’ and that people in those sectors stay in jobs rather than switch to new ones. Although I would expect people in those sectors to be looking around. However as it points out governments haven’t announced retraining schemes or new hiring incentives. It could be another problem that the economic recovery faces and another reason not to expect a V shaped recovery. Along that vein Spain lifts quarantine rules for UK visitors. Which seems to be a dangerous ploy as the two countries are a different stages of the pandemic but illustrates how Spain with its reliance on tourism is being forced to act to save its economy.

Can copper prices surpass $6,000? It rallied strongly recently due to back logs, the lack of scrap, supply disruptions and not least the closing of some mines in Latin America. Key for breaking $6,000 seems to lie with stimulus spending in China. To date that is less than in previous crisis so the answer seems to be No.
It notes copper is used in air con’s and its worth noting that Daikin in Japan has seen a surge in demand; especially for advanced air cons that actually suck in fresh air from outside (although they down take the air out of buildings) have risen in popularity. It’s top of the range model has anti virus air filtration but it doesn't say how demand is for that. So whilst that may not move the needle for copper it certainly is +VE of Daikin and I would also watch the other air con makers like LG and Samsung in S. Korea. You may also want to look at the Chinese ones too (Midea, Haier, Gree and Chigo).

Opinion Huawei’s courtship of Moscow leaves west in the cold. Suggest that unless the West get involved in Russian 5G then Huawei will get the lions share of the 5G in the emerging markets.
It notes that with regard to Russia it has 4 advantages
1. Cost; Huawei’s kit is cheaper, which the writer says is because of financial assistance from Beijing
2. National Security; the choice is who do you want listening to your call. Russia has a preference for China over the US for many reason, not least the history between the two. Also because of the ‘kill switch’ threat. That whoever equips your system may have that hold over you. Again here China wins.
3. Go PR, Huawei has increased its presence in Russia and looked to align with rather than complete with Russian companies and it cites the case of Sberbank.
4. Covid and digital surveillance (although I would guess more that just on medical grounds). Huawei’s ’Safe City’ has impressive features.
I think the key is #2. Worth remembering that Huawei came into being because China didn’t trust Cisco’s system. I also think the reason that the US have not reveal how the Huawei system is compromised is because it uses the same features to listen vis US systems and China does via Huawei.
The writer says the the west should get involved in Russia otherwise Huawei will have carte blanche and them be able to use Russia as its poster child to gain contracts in S Africa and S America and elsewhere.
I think at the end of the day most nations will realise its more about who you want to die easy access to your conversations and data.
Lastly I think worth noting but not mentioned Huawei still has an issue on getting chips for its 5G and that high yet prove to be the ultimate decider.

‘Apple tax’ casts cloud over WWDC gathering Third-party developers cry foul at tech giant’s 30% charge for in-app payment processing. The normal annual gathering will not have the same stature as previous years as it will be free and streamed virtually. Makes you think the business model for a lot of key events is going to change going forward.
The event is also overshadowed by the ‘Apple tax’ issue; imposing a 30% levy on ‘in-app’ purchases; something it has done since 2011. It was a shock then and whilst accepted since, it has prompted complaints. It’s risen to prominence again due to Brussel’s launching two anti trust probes last week. 'One looks at whether App Store payment policies put rivals at a disadvantage; the other asks whether Apple is undermining competitors by limiting access to near-field communication for contactless payment in stores.’
The article cites a couple of examples which Apple says are overblown. With reading to the in-app payment it says that people can buy outside the app just that the option to buy in-app should be there.
Some complain about how if treats different companies regarding the levy. Uber and AirNb are not charged but Spotify and Tinder are?
Key I think is the quote from one developer; who views the levy as a marketing expense '“We drive traffic through the App Store,” he said. “It’s seamless, it’s one-click. Apple has all the eyeballs so you pay to play, right?”’
If the developers of apps are driving the business and doing all the work (in meeting Apple’s standards and requirements) then 30% seems excessive to say the least.
For investors this is likely to be one more concern coming at a time when governments are looking at the taxation of big tech, especially those that have down well during the lock downs. Apple could also face disruption if the situation between the US and China gets worse over the HK issue. I still think Apple is a good company and I use a lot of their products but a 30% levy as one developer said is ‘comparable to a mafioso shakedown’ 'David Cicilline, chairman of the US House antitrust committee, agreed, telling The Verge that Apple’s 30 per cent fees were “exorbitant rents — highway robbery, basically”.’

Insurers and SMEs fight over payouts for lockdowns Court case will seek to define extent of coverage under interruption policies. The UK’s FCA is going to get eh High Court to decide is the pandemic is covered under business insurance policies. It will be followed widely because o the somewhat standard wording in policies. The insurance industry is warning that if it looses then some insurance companies could go bust. That’s in contrast to a lot of SME’s that have and will go bust regardless. It makes the point too that even the insurers loose it will be a long time before they pay out, there will still be loss adjusters and other negotiations to take place before the money is actually paid out. Again that may mean more businesses go bust.
Even if they win the insurers face a bleak outlook as there will be less businesses to insure in the short term going forward and premiums are likely to be higher. Not a great business scenario.

Banking regulators warned against protectionism in pandemic response. The Institute of International Finance (IIF) notes that so far regulators have worked well but the concern is that as the defaults and failures start to occur regulators push for more protective measures. Post 2008 ring fencing has been popular but it constrains financial institutions from being flexible. So the IIF want regulators to work together and effectively look at the big picture. It calls for a co-ordinated approach and the sharing of information. A timely reminder coming ahead of the Feds stress test results for the biggest banks in the US.
In reality it all works well until someone gets scared that they are going to suffer and acts in they own best interest.

For Interest
Financial wizardry casts spell on private equity returns
Claims of superior performance captivate investors stuck in muddy waters, writes Chris Flood. Looks at the use of ’subscription lines’ to help boost performance.
'New money pledged by investors is widely used by private equity managers as security for bank loans that are then used to pay for buyout deals in advance of receiving the clients’ capital. This technique, known as subscription-line financing, helps private equity managers earn lucrative performance fees because a key assessment metric, the internal rate of return (IRR), is based on the date when an investor’s cash is put to work. Delaying the date when client money enters the fund boosts the IRR but it also reduces the ultimate cash flow to investors because they pay the fees and interest on the bank loans.’
Also helping is that there is no standard practice for calculating IRR’s. An interesting an worrying read.

Bloodbath awaits commercial property investors. Looks at the impact of the expected defaults from commercial property although not currently selected in share prices. Mush of that is probably due to the fact that there are a lot of investments wrapped upon CLO’s and CMBS’s. Which have seen support from the Fed’s action to buy commercial debt and from the fact that at present repo financing is cheap. But in time whilst the holders of the AAA tranches may be okay those holding lower levels may not be so lucky. That could impact on pension and investment vehicles that bought them in search of yield.
It expects it to unfold not as a crash and recovery of deals from administrators but that 'Investors will find this more like being in a wheelchair pushed down a very long flight of stairs.'
I think this is possible although at this stage a lot of lenders are offering forebearance, watching to see how things work out. But they are all probably watching the exit.

FT BIG READ. INTERNATIONAL POLITICS All eyes on America As the Black Lives Matter movement goes global, the calls for racial justice and equality and an end to police brutality demonstrate how the US continues to act as a moral and political touchstone.
An interesting read and it's notable how people in China have not identified with the movement for the most part. This could be the lack of coverage or the fact that it is being portrayed as an American problem. It has a short piece by Ai Weiwei, now living in exile from China. He supports the movement but calls for it not to be narrowly focused. He notes that everyday refugees lose their lives, that the West has little interest in the plight of those in Asia. He cites the case of Tibet. He hopes that the grievances could be viewed as untied and that then an attack on anyone was an attack on all. That would be powerful and I suspect that make even China stop to think. Unfortunately in the current world it is unlikely.