FT June 29 HK Exit?, China/EU, Luxury in China, Japan Rail, US SME barometer
Today’s paper I would say was quiet. No mention of standoff’s between China and India or the US and very little mention of Hong Kong.
Markets all opened lower
JAPAN Opened lower and sold down before rebounding but dropped again after lunch and traded sideways.
S KOREA Opened lower Kospi then worked higher for the first 90 minutes before reversing. Kosdaq trading sideways for the first 90 minutes but then sold down. Both seeing a small bounce in to the close.
TAIWAN Opened lower and drifted lower in the morning but then traded sideways.
CHINA CSI 300 Opened lower and trended lower through the morning. PM it traded sideways.
HONG KONG opened higher but quickly sold down to the ADR level and then trended lower through the morning. PM saw an initial bounce but that loos to be fading.
EUROPE Expected to open lower with covid-19 concerns
US Futures opened 180pts lower but rebounded through the Asian time zone; currently just -30pts
Hedge funds turn towards Singapore as race hots up to lure HK business. Looks at how Singapore amongst others is looking at trying to attract funds, which currently operate out of Hong Kong, to move in the light of the implications of the new National Security Law expected to be imposed on Hong Kong shortly. Singapore’s lates axe is the promotion of a 'legal structure earlier this year called the Variable Capital Company, designed to lure the assets of fund managers and family offices registered in low-tax jurisdictions such as the Cayman Islands and Luxembourg.’ That and the ability to off-set up to 70% of eligible set-up costs up to a maximum of $108k.
Japan and Taiwan have also been seeking to attract funds.
At this stage as we don’t know much detail its difficult to judge but I would imagine a number of US and Canadian funds are looking carefully at their options and whether they really need to be entirely in Hong Kong or can move some operations.
Once the details become know then options can be properly evaluated.
Local press notes today that whilst China has said the new law will carry a maximum 10 year jail sentence some are pushing for life. Also the revelation that China didn't want to make the details of the law know for fear of it inciting unrest is not a good indication on what it might contain. As I wrote in my piece earlier my biggest concern is the those who are reporting to Beijing are not going to even express the wishes of the 57% of the Hong Kong population who don’t want to bill. Only the support for the bill. That is why China so often makes policy mistakes because it only hears or is told what it wants or expects to hear.
Investment treaty talks with China at ‘critical stage’ says Brussels. Looks at the talks that have been on-going for 6 years. It has historically benefited China to move the talks along slowly whilst taking advantage of the liberal systems in Europe. But having not done so now the pressure is mounting and at a time when China can least afford to play hard ball as it needs access to as many foreign markets as possible to keep its exporters in business. Especially since the resurgence of covid-19 cases could put demand recovery in doubt.
The key for Europe is ensure equal access to Chinese markets; that means addressing issues like subsidies, forced technology transfer, general market access and removal of equity caps/JV requirements and more transparency over Chinese state aid. I doubt the talks are going to be easy.
Luxury brands join China’s livestreaming boom to revive sales. A new line for China’s online influencers. Historically they have been more about discounts and raising brand awareness. Looks at how despite not having confidence in their ability to sell ‘luxury’ Amanda Xie and two other ‘key online influencers’ managed to sell 300 Tiffany necklaces worth US$3,500 each; most to wealthy women in small Chinese cities. Now whether you consider Tiffany luxury or not; the point it makes is that is demand and its about the best way to tap that demand whilst, for the luxury end of the market maintaining exclusivity. Online influencers in China have made a mark but the stores are still the main drivers. Its the shopping experience that is a large part of the event. The article notes
'Jo Sun, a Shanghai-based influencer with 693,000 followers, sells an average of 70-80 items worth more than Rmb1m in three hours for brands including Gucci, Chanel and Louis Vuitton. In contrast, a top-performing luxury store in Shanghai or Beijing achieves between Rmb500,000 and Rmb700,000 in sales a day, according to store managers.’
Livestreaming is better than an advert but there is a risk to the brand if the product then loses its ‘exclusivity’ appeal by having the wrong influencer or the livestream setting is wrong etc etc.
No doubt there will be a niche for some labels but I think for most it will still be a matter of the in store experience, the service etc. Watching some thing on TV and it arriving in a cardboard box in the mail I doubt will really cut it.
It does open up the prospect for luxury brands to offer their own delivery service. You can imaging how impressed the neighbours would be when the van in the Louis Vuitton livery turns up at your house to deliver the latest handbag!
Japan tunnel dispute threatens to delay world’s fastest railway. Looks at JR Central railway’s magnetic levitation project which has hit a snag. That being a 9 km tunnel in Shizuoka prefecture where the governor has refused to allow construction, citing concerns of water diversion that the building of the tunnel may divert. The article notes that some think the company underestimated the concerns, whilst others point out that the project doesn’t benefit Shizuoka and in some ways disadvantages it. There is the water but also the fact that it doesn’t have a station on the new line. The problem is having pushed the environmental card and with elections next year its now difficult to ‘do a deal’. For JR Central; it says it can weather any delay but Moody’s cut its outlook on the company.
Opinion looking at America. Small business: a canary in the coal mine which Rana Foroohar reckons is the best economic indicator currently … and they are in trouble. I’ve written about this before but it is good to see the points being made again.
SME’s represent about 50% of US employment. 70% have been helped by state benefits, but most of those end this month just as the PPP scheme reverts to pre covid levels. All of which will impact consumer spending and that is likely to knock onto a wave of small businesses (assuming the US doesn’t announce a new package of support stimulus).
It notes that revenues for personal service contractors were down 80% these are usually sole operators it says like locksmith (no one going out so key not lost), hairdressers (covid concerns) or pet sitter (no needed in the WFH era). The article says according to CS research by Mid June almost 50% of US small business owners did not expect a return to normal operations with the next 6 months.
Another interesting note from the article; the health club, restaurants, retailers employ circa 50% of the US workforce vs the S&P 500 companies that only account for 10% of the work force.
However markets remain buoyant and largely optimistic. They can stay that way for a long time before correcting despite the evidence from walking down ‘Main Street’. It also notes that a lot of the SME’s are not designed for lockdowns, most of them aren’t run out of front rooms but the stores you see on Main Street.
Rana sums it up well 'The knock-on effects of all this will be huge.'
For investors though the reality is that they have to remain invested, hopefully up to the point just before the true impact is seen. Markets may not be reflecting the realities of the market but most investors do not have the luxury of watching from the sidelines; prudence may say sit on the sidelines but at this stage performance says you have to be involved. But the key will be investing in those seemingly immune S&P and Nadaq names which seem to be safe or in market leading brand names with solid cashflows and limited borrowings to finally stocks with plenty of liquidity so that when the music stops you can hopefully get out.
China overtakes UK to become world’s fifth-largest fund hub. A sign of the growth in its investment sector; which went from tenth position to fifth. The article is upbeat that the growth will continue due to the mobilisation of savings to investment products and strong digital distribution. I think all that is true but I can see a risk from the downturn. Many families in China will need to use their savings to make up for a loss of income or at least cut down the amount of savings going into fund products. There is also a risk that that some fund products blow up; a constant worry in China.