FT Weekend: HK cash, US/HK Listings, Hard Questions and more


FT Weekend: HK cash, US/HK Listings, Hard Questions and more

Hong Kongers send their cash to rival Singapore as protests deepen turmoil Looks at how Singapore banks have attracted record fund inflows from foreign deposit holders over the past year.  Whilst the HKMA says it is not seeing any outflows and having spoken to some HNW managers who also confirm that they haven’t seen money being sent to Singapore or elsewhere.  It is apparent from the data that the rich Hong Kongers are not repatriating off-shore income back to Hong Kong but sending it to Singapore or elsewhere.  I also thing much of the off-shore income it is being reinvested into property outside Hong Kong; like Australia where interest rates are low and there is a clear policy of standing up to China,which will re-assure Hong Kong residents.

China’s JD.com gears up for $4.3bn HK listing which will make it one of the largest offerings this year. Listing in Hong Kong because to the threat to is US listing and HK Exchange is expecting other Chinese companies listed in the US to follow suit. As I have written before I find it difficult to believe that Trump will force the Chinese companies to delist in the US because of the risk to US consumers but allow US pension and investment funds to own them via Hong Kong. I still think there is a risk that Trump further weaponises US pension money as he has influenced US Federal Pension money not to invest in Chinese companies. Short term very positive for HK Exchange but not without risk.

Australia proposes tightening of rules on foreign investment. New proposed rules, essentially based on national security grounds and not purely commercial ones the government was keen to point out. The rules include a last resort power vested in the Finance Minister who can impose conditions or force a divestment even after the deal has been approved by the Foreign Investment Review Board. The government wants tonsure the rules keep up with and are appropriate to the risks being seen and global developments. It has yet to define the national security businesses but already labeled ’sensitive businesses’ are media, telco and those serving the Australia defence services. Comes as tensions with China are growing especially after the treat from China to boycott Australian products after the government called for an inquiry into the origin of covid-19.
I think that China’s threat of boycotting goods could end up harming China more in the long term. Whilst China is trying to promote domestic consumption it makes some sense but two factors are apparent. A lot of domestic Chinese goods are seen to be inferior to foreign ones in terms of quality or safety (baby milk). Additionally as a recent US survey showed foreign consumers are capable of taking their own acton by boycotting Chinese made goods and that could hurt China even more.

Kirin orders independent investigation of Myanmar beer ventures. Its been under pressure for more disclosure over its operations in Myanmar where it has 80% market share. One wonders though if appointing Deloitte Tohmatsu Financial Advisory will have any more success than its own requests for information from its join venture partner the Myanmar Economic Holdings Public Company. The company has said it may consider alternative structures but it was not considering leaving the country. Makes you wonder how the mandate to Deloitte’s was worded; please investigate but regardless of what you find we aren’t going to be leaving? I wonder what their stance on ESG reporting is?

Under the hood Rush to issue equity and shore up balance sheets. Global tally hits $67bn since start of March, with healthcare proving the most active sector and US the busiest market. For Asian investors the interesting thing about the article is the absence of Asian companies. Its a two edged sword, it indicates to me that Asian companies run with generally sounder balance sheets than those in Europe and the US but that also means that shareholder fail to get the benefit of leverage in the good times; which have tended to outweigh the bad ones.
In the same theme read US businesses rush to stage listings after record rally Further deals are coming say bankers as Wall Street has its busiest week in a year. Makes the point that since 2000, less than one-tenth of US$100m plus IPO’s have not been carried out when the VIX is above 25 points. All this is happening despite many stating concerns over assets prices and the economic data. Key is that bankers are 'making hay while the sun shines’ bringing forward IPOs with US market back to close to the highs seen earlier this year, largely because the future looks evermore uncertain. I think part is due to the rise in personal investment accounts being opened, suggesting that a lot of retail money is driving the market; there are even TikToks on which stocks to buy, which in Asian terms is rather like your taxi driver giving you stock tips. Historically a bad sign. Covid-19 has been different in a lot of ways but I worry in terms of stock tips; it may not be.
IMPORTANT If you look at the HSI 10 year chart you will see we are trading in a key zone, we are testing a key resistance level and I think now is the time for caution. Lots of things have changed over the years; back in 2011 it was all about the HSBC, Mobile, Hutch, and the key property stocks. Today it's Tencent, Alibaba, Meituan and Chinese Financials and maybe a few Property stocks. But I still believe the trend is your friend. We have been encouraged by recent data which on a month on month basis suggests improvements are being seen. BUT that overall macro data is weak. Govenments and central banks (China being an exception) have provided unprecedented stimulus, and trading volumes are high. Monthly data has recently been good but its coming of the March lows when the world woke up to the real impact of covid-19 and went into lockdown. We still don’t have a vaccine or cure. We have serious concerns about the US/China relationship and China with a number of other countries. We have the breakdown of globalisation, which is likely to mean rising costs. Markets seem to be priced for perfection, based on the of optimism of one or two months improving data relative to a historic sell off. I think the demand for equities is still driven by the lack of alternatives for retail investors and the fact that with interest rates close to zero cash is mis-priced.
Writing this ahead of the expectation that Hong Kong opens strongly on Monday according to the ADR’s (+279pts @ 25,049 and you can expect a short squeeze too) and excepting that Sunday’s China trade data is in-line, seems perverse but I still do not think the real risks are being priced in. Time will tell. A number of more skilled and knowledgable fund managers than me are saying the same and no doubt loosing money for their caution (see Lex Friday Hedge funds: bear with us 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.’ ). But I still think caution will prove to be the right. Sell a little into Monday’s rally, check your valuations and wait.
Read also The Long View Investors swept up in optimism need to ask hard questions. Looks at the recent optimism and yesterdays amazing US jobs numbers the swing into risk assets and notes despite of all the good news investors should be asking hard questions about what they are seeing and doing. It thinks the key question is 'whether current stimulus efforts can truly repair the economic damage wrought by the pandemic; and whether the long-term consequences of shutdowns will prove inflationary.’ It sets out a couple of responses. Longview Economics things the evolution of credit is key to whether we see an inflation boom or deflationary bust. Loose credit helps asset prices rise but against the current backdrop of pandemic and social unrest raised the likelihood of policies from governments to redistribute wealth. Higher taxes and regulation also threaten profitability which hurt equities. But bonds also likely to suffer due to current low fixed rates when inflation set to rise.
Tighten credit hurts weaker companies and real estate that have benefited from cheap money and heightens the deflationary challenge for central banks and overshadows recovery. Recent moves by central banks to backstop credit markets but buying lower grades of credit has provided a stop gap for some companies but they are still reliant on debt. The fiscal measure can only do so much, when small companies fail it will feed into hurting larger and larger companies. Hence why some investors remain cautious; worried about elevated unemployment which may drop short term is unlikely to return to last years levels any time soon, regardless of whether its a V, U or W shaped recovery. Increasing saving rates by individuals and companies will hamper the recovery too. In such a world buying some insurance to protect your portfolio makes sense.

Also in the same vein Brighter outlook prompts banks to move mountains of ‘hung’ loans which notes that GS and DB pulled out of underwriting Advent International and Cinven’s €17bn acquisition of Thyssenkrupp’s elevator business because they were worried they would not be able to sell it to fund managers. The FT wrote a few articles about the pressure on Cinven’s fund and having to write to shareholders to ask them to vary the funds structure. But no longer as the article says 'such is the strength of the snapback in demand for junk bonds and leveraged loans, the banks are aiming to launch the mega-deal as early as the end of this month, according to people familiar with the plans.’ They are not alone there are a huge number of other such deals out there being brought forward in the US and Europe. The question is are we still in a ‘hung deal’ environment? As recently as Monday the article says 'Bank of America, RBC and Barclays sold $1bn of loans backing technology company Xperi’s acquisition of digital video recording business TiVo at 90.5 cents on the dollar,’ a significant discount in order to shift some risk. So getting the Thyssenkrupp deal will be close watched.

Loan investors are ruing the lax terms made in good times over the past couple of years the FT has written a number of articles about the relaxation of covenants and other provisions in loan documentation and the potential risks that entailed. But it was a result of banks and other others wanting to secure business and with interest rates so low the only potential variable to make a deal attractive to the borrower were the terms and covenants. The FT and I warned it would end in tears and as this article points out it is. Notes that there is a new term in the US loan markets “J-Screwed” referring to the fact that the company took full advantage of the market to move assets out of the reach of lenders. It then used them to raise new debt to be paid first in the event of bankruptcy…..which has now happened. It cites a couple of other cases where similar events have happened and I am sure there are a lot more to come. As Jeremy Grantham of GMO said this week, and I know he was referring to the wider stock market but I think it true here too “If it does end badly, the history books are going to be very unkind to the bulls.” The people touting these loan deals over the past couple of years may have to face some very tough questions.

US jobs surge fuels recovery hopes Adding jobs rather than seeing further job loses reflecting what was seen in the ADP data. But one still needs to take a perspective on the number which is still very high. Key is that some of the industries that were swift to cut jobs have started to re-hire leisure and hospitality, construction, retail and education. It is also notable that healthcare is still hiring as it has been throughout the crisis. Also worth noting that Government cut 595,000 jobs as local authorities cut their payrolls -VE. The data prompted the US Treasury to move above 0.9%. The article notes that some asked if the numbers mean not so much stimulus is needed but I doubt any government is going to cut stimulus on the basis of one set of jobs numbers when so much other data is weak. But is does suggest that inflation is more likely to re-appear.

Lockdown easing brings ‘buyer’s market’ in shops, hotels and skies Consumers wooed by eye-catching deals but executives warn against wall-to-wall discounts. Looks at the discounts in the US where stores have been under lock and were re-opening with elevated levels of stock (and some of it seasonal clothing) that they were trying to clear. I think this is largely a US/European phenomenon, in Hong Kong the social distancing precautions meant a lot of stores and outlets have stayed open.
However for those US once they have clear the inventory normal pricing will quickly return; as the stores will have amended their future orders and that is likely to mean a reduction in exports from and number of Asian countries/companies that make those items.
In the UK I suspect inventory levels were already being reduced as the UK government was late to bring in lock downs.
For goods that have been in demand during lock down there are unlikely to be discounts although with a return to work ordering levels are likely to drop.
It suggests that the same mentality of offering discounts will be used by airlines, hotels, restaurants and others to woo customers back. Looking at aviation it notes that in China the domestic carriers have cut fares by 40%. That works were there is true competition as there is in China, the US and Europe; it will be interesting to see the stance of carriers like Cathay Pac on routes where they feel they have less competition. For holiday makers; hotels will be offering deal to try and tempt them to fly again but they may face the added complication of quarantine rules when they return from their holiday!
Restaurant are caught in the difficult position as social distancing will have added to their costs and so they will no doubt depend on brand loyalty more, combined I suspect with the fact that many people will have grown tired of home cooking.

Opec output curbs spur US shale to boost production. Interesting because the Baker Hughes total oil rig count not Friday night in the US showed another week of dealing rig numbers. The article says many of the recently shut down wells are likely to reopen, with output rising 20% by the end of August but then ease back as spending cuts hit drilling active later in the year. But it points out this could worry OPEC, Russia and others whoa re expected today to announce the extension of recently agreed production cuts. Nice quote
‘"In its bid to balance the market, Opec has perhaps again forgotten that shale plays by its own rules,” said Jamie Webster, a director at the BCG Center for Energy Impact.’
Key is that the US, whilst happy to put pressure on Saudi and others, is really out to do what is best for itself not the world.

The economy will not snap back after Covid-19 Asks whether post covid is going to be like a rubber band snapping back when released or or a piece of stretched plastic that remains permanently distorted (hysteresis)? Basically it sets out that some things will return but others will not.
Key point being if you ask the question post covid ‘if we started from scratch would we do this again?’ And the answer is no, then expect change. High Streets/retail was already changing; expect more change. Automated jobs will not return in advanced economies. Not mentioned but will less developed economies make leaps forward? Or will the financial cost be prohibitive?
But other activities will return; Music and concerts, Air travel for business and tourism.
will take time to recover they will come back.
One last impact will be on those going through education. Whist much can be done via on-line education there are a lot of skills it can’t teach and the risk is that some children will be left, if not permanently, then significantly disadvantaged.

For Interest
British Airways threatens legal action on UK quarantine rules. Key to me is that the UK has, throughout covid-19 demonstrated that it has no real plan, just a series of knee jerk reactions to events.