FT 25 June Mao's tipple, Google no HK, Olympus, Gold, Zombies and more

FT 25 June Mao's tipple, Google no HK, Olympus, Gold, Zombies and more

Markets Closed are Taiwan, China and Hong Kong for Tuen Ng Festival (Dragon Boat Day), Taiwan and Hong Kong markets re-open Friday, China on Monday.
Japan opened lower and sold down in the morning before trading slight higher/sideways in the PM. Closed -1.2%
S Korea Kospi and Kosdaq opened lower but as expected traded higher initially but failed to regain yesterday’s closing levels and then sold off. From around mid day they traded sideways to Close Kospi -2.3% and Kosdaq -1.2%.
European markets have opened lower and look to continue yesterday’s sell off with the IMF report dampening sentiment.
US Futures opened around flat have sold off and are currently -300pts plus. With a lot of key data out today it’s going to be a tough day unless the data is very good and the covid-19 cases drop significantly.
Data due GDP Growth Rate & Price Index, Durable Goods, Corporate Profits, Goods Trade Balance, Wholesale Inventories, Initial Claims, PCE Prices, Core PCE Prices, EIA Natural Gas Stocks Change, Kansas Fed Manufacturing Index, Fed Stree Test Results for Banks

Mao’s top tipple blazes ahead of western rivals Kweichow Moutai distiller becomes China’s most valuable business, capping AB InBev, Diageo and Heineken combined.
Looks at the tremendous success story helped by its association with Mao and other prominent historical and current figures. It is seen as the epitome of success in a culture that values conspicuous consumption. The big driver for the stock is the fact that its production is restricted; it relies on water from the Chishui River, and the process has a heavy use of water (heating, cooling, humidification, fermentation and cleaning, Plus it also generates wastewater (liable to more control costs) and the cultivation of sorghum and barley also requires water) so in the future environmental and drought issues could also impact its production. But it manages that well at present. Control of the price is key, the company had a profit margin of 92% in Q1, so the company currently has a lot of sway in setting the price. Interestingly the distributors make even more. They are responsible for 55% of sales. The article points out that Moutai sells the product at less than half the retail price, while retail prices have quadrupled, the factory gate price has only doubled. Which adds to demand from investors buying the product not just the stock.
It is a core holding for many funds as a play on Chinese consumption. But there are risks; as it is also seen as a barometer of corruption and in 2013 suffered as President Xi started his anti graft campaign. But for the time being it looks to be on a good run, helped by being in the MSCI Emerging Market Indices. Some think it is overpriced and that the bubble will burst. It’s currently trading at a 5 year high. It sold down to CNY1,000 in the March sell-off and is now at CNY1,460. Helped no doubt by drinks to celebrate the award of new infrastructure contracts. I think in a society that values key bits of history the link to Mao and the resurgence of Nationalism and President Xi adoption of the Mao-ist mantle means that the stock will continue to do well. In many ways the corruption risk is now lower than before as people have not forgotten the 2013 purge. Environmental cost risk is probably reduced as China seeks to get its economy moving. Drought in some respects would be a slight +VE
All in all, it seems to have everything going for it. Buy on pull backs, as it might re-consolidate at CNY1,400 again which was a key level at the begining of the month.

Google seeks alternatives for Hong Kong undersea cable. Link sparks China security concerns. Focus shifts to south-east Asian hubs. The Pacific Light Cable Network was proposed at US, Hong Kong, Taiwan and Philippines. Recently the US warned against the Hong Kong link due to security reasons; basically data exposure to China. The result is potentially another win for Singapore; which wants to be the gateway hit for cloud providers in South East Asia.
I think a lot of companies are concerned about their data security in Hong Kong and will looking to install new servers outside Hong Kong and minimise the data accessible in Hong Kong for fear the New National Security Law is going to allow China to monitor an access locally stored data. I wold also expect Hong Kong internet access start to be restricted too. All of which makes Hong Kong a less attractive place for International business.

Photo finish Olympus sheds camera division after 84 years, with sale to Japan buyout group. Selling its unprofitable business to Japan Industrial Partners, a private equity group that owns the Vaio laptops pioneered by Sony. It's another step in the revamp of the company which makes 80% of its sales from medical devices; especially endoscopes. That business has suffered due to covid-19 as hospitals defer non-urgent procedures. The CEO is under pressure to restore investor confidence since it ousted Michael Woodford in 2011 after he uncovered an accounting scandal at the company. Last year due to pressure from US activist investor ValueAct (who started building a stake in 2017) it accepted 3 foreign board members. Its share price was +10% today (at the time of writing) and is trading around 5 year highs which suggests that the changes are being appreciated by investors.

Credit Suisse reviews $7bn range of funds Swiss bank studies role in circular flow of financing to SoftBank start-ups. Follows up on the previous FT story on the matter. Watch for more developments.

Telefónica boss eyes dealmaking boom for Europe. Álvarez-Pallete expects looser competition rules and higher valuations after EU judgment. That could be good news for CK Hutchison’s 3 who back in 2016 had their bids for the O2 network blocked. The Telefonica boss expects valuations to rise as a results another benefit to CK Hutch. The stock has been under pressure and whilst off the March lows, not by much.

Gold hits highest price since 2012 as nervous investors seek haven assets. Its benefiting from investor nerves over covid-19 and global recovery. The article notes that Gold ETF’s have seen increased demand and the amount of gold held by those funds has risen 23% to the highest level in 12 months. Key for many is breaking above US$1,800 which the article says could happen if physical demand in India returns after the monsoon season. I wouldn’t be surprised if it happened before that having hit $1,772 last night. There are Chinese miners (Zijin Mining and Zhaojin Mining) but better plays are probably the Australian ones; Evolution and Saracen; worth taking a look.

LEX Japan small-cap frenzy: losing their bearings. Looks at how listing on the Tokyo Mothers Index are benefiting; probably from the closure of the pachinko halls in Japan; with former player focusing on the stock market. But it warns that the aggressive attitude by investors is stretching valuations and that the odds of successful investing are approaching the same odds as winning at pachinko.

Japan Inc circles the AGM wagons in case of activist attack. Notes how Japanese companies have concentrated their AGMs this week (50% of companies) and in particular to Friday; when 33% of companies are holding their AGM’s. It see this as an example of trying to mitigate and avoid having to take difficult questions from shareholders and in particular activists. But the article notes its not unusual and in the past it was a way of preventing 'sokaiya — those seeking to extort money in exchange for not disrupting the event or publicly embarrassing executives.’ Whilst that threat has receded but the ‘annoyance’ of having to be accountable to shareholders has remained. But the move is also because Japanese companies are the best targets for activists with 'huge cash piles, underused real estate portfolios, non-core business lines, unretired treasury shares and giant portfolios of shares in other companies.’ Many are trading below book value but getting the money back to shareholders remains very difficult but the fact that Japan Inc is resorting to such a tactic probably reveals they are aware of the issues. The article suggests that because Japanese companies don't like public confrontation the effective way to get change is by meeting management out of public sight. I think that is true for the boards it is all about maintaining ‘face’. Whist that is not good, investors need to play with the card they are dealt. There was hope under Abeconomics that that might change but even he seems to have forgotten his arrows.

IMF lowers outlook and warns of public debt burden. Looks at the latest report, which forecasts global economy to shrink by 4.9% in 2020, down a further 1.9 percentage points from April. It also warned about the impact of soaring government deficits. It estimates the crisis has cost governments globally more than $10tn in lost revenues and additional spending. It estimates that global government debt to be 101% of GDP, up 19 percentage points YoY.
It says there is “a large adverse aggregate demand shock from social distancing and lock-downs, as well as a rise in precautionary savings”, PLUS “investment is expected to be subdued as firms defer capital expenditures amid high uncertainty”.
Developed economies expected to bear the brunt shrinking 8% now vs 6% in April
Emerging markets shrinking 3% vs 1% April
France the worst -12.5% vs 7 in April and Spain 12.8% vs 8% in April. US budget will see the biggest hit and run a deficit of nearly 24% of GDP estimates the IMF.
With such debt levels it thinks that some countries will be constrained over the fiscal support they can offer. It expects a more gradual recovery in the second half than previously due to the impact of social distancing. It calls for greater international collaboration. It does expect a sharp recovery in 2021 but with most countries failing to regain their pre covid-19 output levels. Low income groups most at risk which would imperil the progress that had been made in reducing extreme poverty since the 1990’s.
I think the recovery will take longer than markets are currently predicting seen in the overnight sell off on rising covid-19 cases. Until we have a vaccine or cure resurgence of cases will remain a possibility and that fear should overhang individual actions. The fact that it is not at present and that in many arts of the world it is still viewed as a issue 'for others not us’ is the biggest danger.
Read also South Africa budget deficit to soar as virus cases surge 'South Africa’s finance minister has warned the economy is on the verge of a sovereign debt crisis and its biggest contraction in almost a century as the coronavirus outbreak gathers pace.’

US eyes fresh tariffs on European goods Gin and fashion goods in crosshairs as dispute over aircraft subsidies escalates. The US is preparing $3.1bn of European products to be subject to punitive tariffs because of aircraft subsidies as per the WTO decision last year. It has raised some tariffs but now looks prone to do more. The article notes that the US has an advantage because the case it brought and won has been decided. A parallel case brought by the EU has yet to be determined, that will allow the EU to retaliate. It seems rather than wait the US wants to take action.
The move is negative for global trade and a we are all aware will hurt US consumers and European companies that are already under pressure. It follows the US withdrawing from international talks on taxing technology groups and seems to indicate increased protectionism from the US.
To me it adds to the list of reasons not to expect a V shaped recovery.

Editorial Reasons to fear the march of the zombies Policymakers must encourage investment in new companies and jobs.
Just as zombie companies are bad for the wider economy so are the zombie jobs being created by governments trying to stave off the worst impacts from covid-19.
Key is having a plan to keep them going but only as a stepping stone to job retaining. But governments should also look at other incentives to re-order businesses and create a better environment and framework that would encourage new hiring and retraining. It looks at the case in the UK but it will be something many nations are going have address. Worth a read along with Opinion Bailouts should come with strings attached by Patrick Jenkins. Basically that the lesson learnt from the bailout of the banks back in 2008 should applied to the bailouts being offered to public companies now. Key is to avoid top executives benefiting when the money should be used to protect the worker and the taxpayer who is effectively funding it. But more importantly that companies are forced to review they debt levels and what is acceptable. Whilst no one foresaw the pandemic the fact is the businesses were already operating on the basis of best practice for returns and they assumed that nothing would upset the apple cart. Just in time deliveries, minimal inventory, gig economy workers vs expensive staff etc. The model was like the markets priced for perfection. Going forward that will have to change, just as the banks had to change post 2008. A good read.