FT June 19 JD.com, Chinese Banks, Nintendo, Retail Shorts and more


FT  June 19 JD.com, Chinese Banks, Nintendo, Retail Shorts and more

Markets
JAPAN 
opened higher but saw initial selling but with support at yesterday’s closing level and trading sideways around there in the morning before moving higher in the PM.
S KOREA Markets opened higher and initially sold down into the red before climbing back to close into the green
TAIWAN Opened flat and traded sideways all day.
CHINA Opened higher and worked higher all day with a small selloff into the close
HONG KONG Opened lower and effectively traded sideways just below yesterday’s close until 2pm when it rallied 240pts into the green. Currently trending lower but with a pick up in turnover.
EUROPE opening higher
US Futures Opened higher, rallied but have drifted off their higher; still indicating a positive open of about 100pts

Brussels steps up push for parity with China. EU toughens stance on companies deemed to benefit from state support. The idea is not to de-couple from China but to ensure that companies that do get excessive public support from non EU governments are restricted. The move comes after China has refused to honour its vows to open its markets to European companies. The article notes that the commerce vs human rights issue still daunts EU policy. Also that Europe is under pressure to choose between the US and China; a choice it would prefer not to have to make.

JD.com jumps on Hong Kong ‘homecoming’ after raising nearly $4bn. Having opened at the highs it traded lower through the day and is up small today. It notes that 'said interest from US investors had not been affected by hawkish sentiment from Washington.’ I still think that this is a risk that is being under estimated.

LEX Chinese banks: lending an arm and a leg. Looks at how the government telling the banks to make more loans and sacrifice their profits; saying No is not an option (similar to HK banks supporting the imposition of a National Law on Hong Kong). The move comes at a time when the Chinese banks are already under pressure with bad loans expected to be on the rise following the lock downs. The smaller regional banks are even more exposed that the big four state banks. Lex warns 'Do not be fooled. A generous rolling over of risky debt and a sharp increase in new loans has bloated the denominator and diluted the bad loan ratio. Beijing has also signalled that there are no plans to flood the economy with fresh stimulus. This is unlikely to be the last time that Chinese lenders are called on to offer help. Dividend cuts cannot be ruled out. The reliability of banks for investors cannot be assured.’ I think the Chinese banking system is under more pressure than ever and that the historic practice of reclassifying loans to keep NPL’s down will one day come, the current crisis could be swiftly bringing that day forward.

Nintendo surges as investors bet on games
Rise takes Japan group’s stock price above ¥50,000 for first time since 2008. The company continues to do well as investors recognise that video games have not only done well during the lock down but are also going to remain a staple part of life going forward. It’s rally has been growing with demand for its Switch units being reported in the press. The other key driver has been the purchase of its games; where margins are set to rise as customers move to downloading rather than physical purchases. Other stocks to watch on the same basis are Sony and Square Enix (a pure game developer).

India rethinks strategic ties after border deaths. New Delhi likely to boost US relations and reduce reliance on commerce with neighbour. The winner is likely to be the US with attempts to build a relationship with China now in tatters. It does seem to be that China took the opportunity of India cancelling its annual military exercises due to covid-19 to move into areas of land claimed by and usually occupied by India.
India is cancelling a number of Chinese contracts and many India’s are boycotting Chinese made goods, which is a negative when China needs to be accessing as many export markets as it can at the moment.
For China, the article suggest, it's trying to keep the issue low key and has not released its casualty numbers so as not to ‘inflame’ nationalistic sentiment. A benefit of having total control of the media within China.
Not mentioned in the article but a key issue going forward will be how India now reacts and interacts the other smaller nations in the area. China has been stepping up its relations with the likes of Nepal and India needs to do a lot more to rebuild its reputation in the area.
See also Editorial A dangerous stand-off in the Himalayas. Peaceful resolution to border clashes between China and India is vital

Short sellers lose $28bn in bets against US retailers. Looks at how the boom in ecommerce and DIY during the lock down has seen the sector rally whereas many funds it seems shorted the sector. It reports that only a few names have done badly; Tiffany as its takeover by LVMH was put in doubt and JC Penny which filed for bankruptcy.
I must admit I am surprised that short selling would have targeted the sector so heavily considering the growth in ecommerce and certainly for stores that were deemed essential and allowed to remain open there seems little logic to shorting.
It also I think shows how companies when forced to adapt can, and quickly. It should also be good news for the delivery companies. The true extent will be seen in the forthcoming quarterly reports; which may provide some grounding in reality for investors as we will get real insight into the numbers; like how much discounting has taken place and the level of additional costs.
As I have said for some time the lock-downs have promoted a big upswing in DIY and home improvements; so ay nothing of the need to fit out home offices.
I’ve long been a fan of Techtronics (669 HK) and expect it to continue to do well as travelling vacations get cancelled and home vacations provide a further opportunity for more home DIY. The stock recently broke to a new high and yesterday UBS upgraded its price target to HK$91.00. Worth having a look at.

Fashion sense Chanel forecasts ‘difficult’ two years for luxury after revenues make strides Almost the antitheses of the previous article. Chanel says the outlook is tough and it will not be discounting or going into on-line sales. Figures released yesterday showed it saw strong growth last year; with revenues +13% YoY and operating profit +16.6% YoY. Asia was its biggest region and so the impact of covid-19 could be significant, although I would say that those that can afford Chanel are unlikely to have been significantly disadvantaged by the lock-downs which have had a much larger impact on the lower income earners; people who don’t generally buy Chanel.

Qantas suspends most flights until October. With Australia unlikely to open its borders to most travellers until 2021 it makes sense. For investors in the airline sector it is another reminder that the outlook remains very tough. Suspending flights does not suspend the costs of running the airline, specifically the loans or finance deals entered into the buy the aircraft. I remain -VE on the outlook for the industry. The article notes 'The International Air Transport Association warned this week that global airlines could post $84.3bn in losses in 2020. Bookings have plunged and many airlines will need continued state support to survive, it said.’
Worth also reading DHL warns fewer flights will lift freight costs the lack of commercial planes flying means less space for cargo and hence rates to rise. It is also likely to mean that sea freight rates should also see an uptick.
There is an interesting quote from Mr Appel, DHL’s CEO ‘..said the boom in online shopping during lockdown had helped Deutsche Post DHL reduce its reliance on Amazon, which had previously accounted for 6 per cent of its parcel revenues in Germany. He added that he believed globalisation would accelerate, despite the disruptions to supply chains caused by the Covid-19 pandemic. “It is nonsense to say that global supply chains are going to change. Customers will not pay for the extra costs.”’
I think that customers will have to pay some of the additional costs but also that it is likely that margins throughout business are going to be under pressure.

Unease as foreign exchange falls under spell of stocks. Forex is detached from the usual drivers of growth and interest rates, warn analysts. Worth reading as it illustrates that stimulus is distorting all markets. Because this time is different, never have we seem so much stimulus applied or promised and so the historic fundamentals have become disconnected. The real question is whether those former relationships are restored with the stimulus still in the system or whether we need to find a new matrix by which to establish currency valuations.

Read also Scary times for investors as normal rules do not apply by Seema Shah is chief strategist at Principal Global Investors. Summary 'When apparently positive signals can turn negative and back again in a short time, it makes sense to weight portfolios with high-quality, defensive assets such as mega-cap tech stocks and investment grade credit, with a bias towards the US.’
She mentions three things that would normally prompt markets to fall but actually resulted in a massive rebound.
1.The action by the Fed stepping into the bond markets meant that previous normal consequences did not apply.
2.Systematic investing which accelerated the moves of the markets, initially down but then on the rebound higher.
3.Dominance of Tech and the products and services that underpin global businesses

Private equity swoops to profit from pandemic Buyout groups take advantage of depressed valuations with investments and acquisitions. A good read, notes that some groups were able to take immediate advantage of the events at the beginning of the pandemic and make acquisitions whilst a number of investors or other groups were focused on sharing up their positions. Now more groups are focused on potential acquisitions because they have stabilised their other positions. It also makes the point that with regard to KKR who recently bought Coty; it had been eyeing the company for almost 20 years. Key here is those long term ‘what if’s’ acquisition strategies. Also the contrast to the likes of Warren Buffet who waits said effectively when they crisis started they he expected the phone to ring with people offering deals or needing money but the phone was silent.
It seems that an offensive strategy is the key to winning in the current market.

The Big Read AMERICAN ECONOMY A lopsided response to the pandemic The US government launched a vast coronavirus stimulus. But with many of the measures directed at ordinary Americans due to expire, some economists fear the recovery could end up being weakened.
The concern is that, as after the 2008 crisis, it was big business and the banking sector that benefited not ordinary Americans and this time around those same risks are still there. Worth a read because what happens with the US recovery will be a crucial part of the global recovery.

Wirecard’s future in doubt after missing cash sparks investor flight Auditor’s findings pummel German group’s shares and bring call for regulatory shake-up. For anyone who has been following the story it looks like the final chapters are being written. Latest investigations find that Euro1.9bn is missing; equivalent to all its earnings since 2012. Furthermore if it doesnt file its accounts today it is likely to be in breech of loan agreements. Even now the full truth is not know, but it does not look good.