FT 5 June HSBC, Adidas, Copper, Engaging China, -VE Hedgies


FT 5 June  HSBC, Adidas, Copper, Engaging China, -VE Hedgies

Markets saw weak openings following the US
JAPAN Opened lower; Household spending weakened but was not weak as forecast. Market trading sideways slightly below yesterday’s close.
S KOREA Opened slightly higher but initially dipped into the red before revising and now trending higher in the green.
TAIWAN Opened slightly higher and trading sideways in the green.
CHINA Opened flat, saw some initial selling and before rebounding to flat but now trending lower
HONG KONG Opened flat and saw initial selling then rebounded to flat but now trading around flat but trading is choppy.

Banks’ support for Hong Kong security law sparks anger HSBC and StanChart under fire Social responsibility issues raised. Having satisfied local pro China groups and hoped they hadn’t upset local pro-democracy groups the banks are now under fire from the UK and some important institutional shareholders. The point being raised is Social Responsibility and with the ESG lobby growing this could become a much bigger issue in the future; not just for the likes of HSBC and Standard Chartered but other Chinese companies that are involved in Chinese government contracts that some find questionable. It also means the funds have to face the question about not holding them when they are the only UK banks that offer international exposure and obviously they have provided good returns in the past. From the Banks point of view they had no option; HSBC has already had a run in with Beijing over its involvement in the Huawei case and so knows the risks and both will be well aware of how Beijing treated Swire and Cathay Pac over allowing their staff to exercise their legal rights in Hong Kong. Beijing’s intent on tightening its grip over Hong Kong may result in businesses not being able to breathe here. Just as jobs are important for social stability in China it is likely to find the same is true in Hong Kong. Read also Lex HSBC/StanChart: gagging for China profits. It thinks the banks are a bad bet

Adidas sales rebound in China after lifting of lockdown rules. Announced a good recovery of sales in China during May it expects Greater China sales for Q2 to be around the level they were last year. That contrasts with Nike’s warning that it would take several months. The CEO did warn that the recovery would be gradual rather than instant because China looks like being the exception. Whist 2 out of 3 Adidas stores are open they are not operating at 100%.
It also noted that footfall in China was lower YoY and that it boosted sales with ’targeted efforts’. Also that 'the “traffic shortfall was more than offset by an increase in conversion rates and the exceptional growth in the company’s ecommerce business”'
I would be wary of trusting one months numbers as a projection for the whole quarter. No doubt there was sent up demand post the lockdown and special offers would draw in some extra business but whether that continues in a world of job uncertainty remains to be seen. Hong Kong sportswear names rallied on the news yesterday. I think it is a sector that benefits from the stay at home culture and the more relaxed working environment but you only need so many trainers.

Bull charge for copper prices as China demand lifts gains to more than 20%
. Notes that demand has picked up significantly since the lockdowns in China eased; with rising physical premiums being paid for immediate delivery. Disruptions at the S American mins due to covid-19 helping push prices higher. Such a move should be a good general signal for recovery in China, it has been in the past.

Editorial The case for realistic engagement with China Tougher stance on Hong Kong and trade needs careful handling. Looks at how the breakdown between the US and China if not handled carefully could end in war over either Taiwan, the South China Sea or both. Even if there is not a war the standoff will impact global health, climate change and the investment world and the global prosperity.
The past relationship was based on globalisation based on the benefits of mutual trade and I think the west hope that China would become more open. That hasn’t happened. China changed from mutually beneficial trade to China first and not just in trade but policy too.
Covid-19 has prompted the west to rethink its dependance on Chinese production and the while supply chain concept, especially the threat of economic pressure from China. It has also highlighted China’s dominance in key technologies and the threats that can bring for privacy and security. So whist changes are needed they should for the right reasons and in the right measure. Exiting China completely is a bad idea but ensuring in futue full reciprocal access to Chinese markets is sensible. Key here maybe is not to rush in and hope but wait, as the Chinese have done in the past, which has often given them the better deal. Equally letting Chinese products compete in the global market place is necessary too.
It notes that Trump is wrong to try and cut China out of world markets not just on a commercial basis but also geopolitically. Having ties economically, educationally and commercially is important in order to have influence over China’s behaviour towards both Hong Kong and Taiwan.
China’s imposition of a national security law on Hong Kong may warrant the suspension of Hong Kong’s special treatment depending on the terms of that law which have not yet been made known.
More important is that China’s threats towards Taiwan which is a free, democratic nation, should be taken seriously and Taiwan should be given more international support than is currently the case. It sums it up in the final paragraph
'A reset in the west’s relationship with China — involving tougher stances on Hong Kong, Taiwan and trade — should be based on a new policy of realistic engagement. Actions must be based on clear and defensible principles, which stress an underlying goodwill towards China and its people, and a firm desire to work together on global issues. As the current pandemic reminds us, national rivalries ultimately matter less than our common humanity.’
I still think Taiwan needs and deserves a lot more international support than it is getting. President Xi like Trump is under a lot of domestic pressure as well as International but the home audience is his main focus; which makes Taiwan a vulnerable target. The world need to be proactive in making it very clear that such action is not acceptable.

OPINION Three compass points for an EU-China policy Worth a read the points are
1 Unity Europe needs to act as one
2 Reciorocity rules need to be applied equally; open markets for all.
3 Working together
The final paragraph is key
'No one should be naive. Mr Xi’s China has shown itself ruthless in the pursuit of its great-power status and, in the sanctions it has now applied against Australia, that it is unabashed about using its economic power in pursuit of geopolitical interests. Europe should not expect a comfortable relationship with Beijing, nor always to agree with Washington. It can, if it wishes, make its own choices.'

Hedge funds fear another reckoning for global stocks. Investment managers say asset prices are too detached from harsh economic realities. Notes that once again markets are priced for perfection and not pricing in future business failures, job losses and even where there are not job losses there are fears of job losses which also influence people spending patterns and hence impact the recovery. It’s something that I have been saying for a while.
It notes that many are buying options to hedge on stocks and currencies. The article quotes some key managers:-
'Stanley Druckenmiller, a protégé of George Soros who stepped back from managing outside money a decade ago, recently said he expected a wave of bankruptcies and that a V-shaped economic recovery was a “fantasy”.'
'Paul Singer’s Elliott Management, which has $40bn in assets, wrote in its most recent letter to investors that, since the impact of the economic downturn was greater than that of the 2008 financial crisis, “our gut tells us that a 50 per cent or deeper decline from the February top might be the ultimate path of global stock markets”.’
It notes that some feel the ‘Fed put’ may be reaching its limits; something I agree with; monetary policy as Mr Powell told us cannot create jobs or find a vaccine; it is limited and having done so much so far there are limits even if he tells us it will do whatever it takes … it cannot create demand for goods or services.
The article talks of a second wave of job losses later this year, which I can imagine as firms just survive the first lockdowns but then later find their customers failing later in the year. Also the impact of de-globalisation and emergence of inflation, political interference in tech all of which hurt shareholder returns. It could also lead to further ETF redemptions and which would put markets under pressure as the underlying holdings are sold.
It concludes that all that said the action by Governments and Central Banks has been unprecedented and could save the day. Which is true but I would not want to rely on it.
Also read Grantham cuts exposure to ‘one-sided’ Wall Street which again looks at the optimism of Wall Street and the fact that the risks do not seem to be being priced into valuations. Nice quote from Jeremy Grantham, “If you look back in two to three years and this market turns around and drops 50 per cent, the history books will say ‘that looked like one of the great warnings of all time. It was pretty obvious it was destined to end badly’,” Mr Grantham said, adding: “If it does end badly, the history books are going to be very unkind to the bulls.”
Caution seems to be the watchword. If you bought stocks and have seen good gains; it is time to take some money off the table and hold it for possible pullback opportunities which I think we will see. As I mentioned yesterday on CNBC a lot of investors are rising back in because holding cash doesn’t give you a return. But good investing is about looking at the valuations and the risks; setting levels at which you are happy and waiting, rather that chasing markets at these levels. It is interesting to note that Martin Lau of Tencent has been cashing out as his stock hit HK$400; it would appear he has an ideal of a valuation too.
Read also LEX Hedge funds: bear with us It notes that 'Every week of rising prices brings humiliation for pessimists — including Lex. We think the hefty new debts of governments and corporations will slow down recovery. Animal spirits and cheap money are outweighing that view for the moment.’

Investors must not be afraid of inflation’s return. It contrasts the situation in 1981-82 to the current and notes that deflationary forces seem to be in retreat; namely the change in part of globalisation. The current situation we find ourselves in has highlighted that the corporate goal is no longer just lowest cost of production. ESG are becoming more important which adds costs. It notes that capital has lost out to labour in importance along with safety. That suggests that labours pricing power may increase for economic or political reasons. But fiscal deficits are expanding fast but without the expectation of austerity to follow impart because the spending is being financed by central banks; it suggests ‘fusion is beginning between fiscal and monetary policy. Today’s operations are not direct government financing in the primary market but buying bonds in the secondary market amounts to the same thing.’
Notes that in 2008-9 there were worries about QE creating inflation but it didn’t we got deflation.
It sets out there are clear differences between then and now; namely the creation of money which according to the St Louis Fed is at its fasts for 37 years. Recently the velocity of money has been very low but it would have to get much slower to offset the growth in money supply to avoid inflation. Add to that the fact that this crisis is not about the banks and they don’t need to be rebuilt as they are in good shape (so far), and governments are writing cheques to companies which take strain off the banks. Past deflationary forces such as technology and automation are already in play. Inflation is now in the making it suggests and whilst this may ’terrorise many portfolio managers but it should not be feared. If controlled, it could be of enormous benefit for the real economy.’ The reason many portfolio managers fear inflation is because they haven’t experienced it, that along with rising interest rates that tend to accompany it. We are going to need inflation I think, as has been written elsewhere, not least to help pay for all the stimulus!
Worth a read.

Hong Kong vigil for Tiananmen went ahead despite the police ban and was attended by thousands of people across Hong Kong and not just in Victoria Park, although that did see the largest gathering. Whilst numbers vary; the key point is that thousands turned out.
See also Hong Kong crowds defy police ban on vigil Tiananmen event packed hours after mockery of Chinese anthem outlawed which also mentions the passing of the anthem law which now carries a jail sentence of up to three years for mockery of the March of the Volunteers.
That law was inserted by China’s NPC three year ago via Annex III but only passed into law yesterday when Legco passed their own version. It was passed 41-1 with pro-democary lawmakers boycotting the vote which they knew they couldn’t win. Post the September elections that might not be the case; but September is a long way off and Hong Kong’s free elections could be subject to mainland changes. The other difference is that the National Security Law is being introduced by promulgation denying the local lawmakers the chance to modify it. This is a further contradiction of Hong Kong’s Basic Law which is supposed to allow local lawmakers to bring in their National Security Law.

Kenya farms hit as lockdown cuts exports Collapse of foreign earnings threatens domestic revenues and loss of 350,000 jobs Looks at the knock-on impact of covid-19. The lockdowns have resulted in suspension of flights and those flights were an essential part of the business for Kenya’s horticultural industry. The perishable goods supply will probably take years to recovery and there is the unfortunate situation of companies destroying produce in a country that suffers from food shortages. It may be about re-thinking what Kenya grows but it could also be about educating the people in what they could eat too.

For interest
Trump fear of defeat in election is source of danger for America.
Key point is that 'Mr Trump is a weak man posing as a strong one.’ He is trying to make the US public believe they are under threat from 'terrorists, arsonists, thugs, looters and killers’. The reality is very different. But Trumps ratings are dropping; having not faced any great tests in his first three years he now has to deal with three tests in his final year; the covid-19 pandemic which was initially mishandled and the worst economic contraction in recent history (made worse still by his protectionism trade war with China) and now his inability to deal with the legitimate public anger at the needless death of a man whilst being arrested. The problem the article sets out is that 'He is threatening to use powers that he does not have, such as sending the army on to the streets. But he is refusing to use powers he does have, such as marshalling a national response to coronavirus.’
In Trump’s eyes he needs to get re-elected to avoid ending up in court, although I presume even if he is elected it merely delays his day in court and possible prison. As the article says 'Faced with a choice between sabotaging American democracy or a future spent in and out of courtrooms, I have no doubt where Mr Trump’s instincts would lie. It would be up to others to stop him.’ The rest of the world has to hope they do.

Opinion Holidaymakers become speculators as travel risks rise. Looks at how buying airline tickets at present is effectively giving the airlines and interest free, unsecured loan. An interesting read.

TikTok comes of age as political influencer ahead of US election Follows on from yesterdays When tear gas comes to TikTok and looks at how TikTok is becoming political and forming ‘hype houses’ ('mimicking the collaborative mansions in Los Angeles where influencers live and work together on videos.’). It certainly looks as oil it will play a significant part in this years US elections. But it is not only in the US they are in the UK. It will be interesting to see where they arise next. They are not so much about talk from politicians as twitter as people wanting to be star influencers but certainly something the spin doctors will be watching

FT BIG READ. PRIVATE EQUITY Durban’s make-or-break moment Silver Lake has made bold predictions on technology, leisure and travel groups surviving the economic fallout from coronavirus. But its co-CEO’s strategy could come under scrutiny if the pandemic lingers.

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