Oct 20 FT Thoughts Taiwan threats, China's growth? Ant and lunchtime updates


23 Oct

Oct 20 FT Thoughts Taiwan threats, China's growth? Ant and lunchtime updates

Asian Markets at 1:30pm HK time
JAPAN 
Futures indicated a lower open even as the US futures opened higher. The market opened lower but traded higher but hit resistance @ 23,674 just short of yesterday’s close. It tested the resistance several times before selling back down to the opening level and trading sideways into lunch. PM saw the market open lower and traded down currently trading sideways/lower -0.6% @ 23,540

S KOREA Market opened lower following the US sell off but rallied into the green in early trades hitting 2,358 in the first 35 minutes but then trended lower in choppy trading to 2,322 around midday and since then trended higher to 2,340 level and trading sideways Currently -0.3% @ 2,339
Kosdaq following a similar pattern currently -1.4% @ 811
SK Hynix -1.2% but off its lows on news it will buy Intel’s NAND memory and storage business for $9 billion. Hyundai -1.8% and Kia -0.2% but off initial lows after announcing more provisions

TAIWAN Opened lower 12,890 but rallied in early traded back above 12,900 but unable to hold and sold down to 12,865 but 10am then traded sideways in a tight band. Currently -0.2% @ 12,855
Data due After Market Export Orders

CHINA CSI 300 Opened lower following the sell off in the US. But rallied in early trades but then tried lower to the morning low around 11am before rally back into lunch just off the day high. PM CSI opened flat but worked higher currently +0.3% @ 4,771
Shanghai Opened lower and traded sideways. PM opened higher currently flat @ 3,314
Shenzhen Opened lower and initially tested lower to 2,239 before rebound to flat and trading around that level until just before lunch when it rallied to 2,257. PM opened higher currently +0.7% @ 13,513
Data on the open
Prime Loan Rate 1 year Oct 3.85% vs 3.85% Sept (F/cast was 3.85%)
Prime Loan Rate 5 year Oct 4.65% vs 4.65% Sept (F/cast was 4.65%)
Housing Price Index Sept +4.6% YoY vs 4.8% Aug (F/cast was 4.7%)
Detail 
House Prices slowest gain since Feb 2016. Tier1cities still seeing good gains which means the weakness must be from the lower tier cities.
Shenzhen 5.3% vs 6.2% August, followed by Chongqing 5.3% vs 5.3%, Shanghai 4.5% vs 4.5%, Beijing 3.8% vs 3.4%, Guangzhou 2.1% vs 1.6%, and Tianjin 0.8% vs 0.9%. On a monthly basis, new home prices advanced Sept +0.4%; the least in six months, after +0.6% August.

HONG KONG Pre maket @ 24,572 +29pts vs -144pts @ 24,398 ADRs but then sold down to 24,457 before rebounding to test 24,600 around 10:15am but then eased back to retest 24,500 level with a small bounce into lunch. PM opened lower currently testing support -0.2% @ 24,488
Data due After market we get Unemployment Data

EUROPE Expect market to open flat following Asia but UBS reported Q3 with net income +99% which follows good number from Julius Bear yesterday and should give the markets encouragement but covid and Brexit remain dampeners on market sentiment.
Data due Eurozone Current Account and German PPI

US Futures Opened +100pts on hopes of a stimulus deal but have eased back to +80pts. Expect a flat open as traders watch for developments.
IBM reported after market Monday and was lower in extended trading as reported its third consecutive quarter of declines but inline with market f/casts. It gave no new guidance but warned of continued uncertainty over the strength of global IT demand due to the coronavirus pandemic.
Data due Housing Starts, Building Permits, Redbook, API Crude Stocks Change. Speech by Quarles and Evans. Earnings from Procter & Gamble before the bell, while Snap and Netflix after the market closes.

FT Online
Presidential debate organisers hit mute button on microphones.
Unfortunately they are only going to do it during the first two minute opening speeches of each segment. I am sure after the first encounter some were hoping it could be for the whole time.
It should improve the encounter but as neither party really seems to understand that a debate should be a matter of allowing the other party to put their view and then responding by putting your view; with the aim to convince listeners which one is correct. As a result I am sure that Thursday’s event will once again lack any real substance.

Print Edition
Taiwan says Chinese officials beat up diplomat in Fiji ‘wolf warrior’ attack
. A very undiplomatic incident but seems to reflect the pressure that Beijing see’s itself under as Taiwan seem to be gaining more international support. It seems that the Chinese officials wanted to gatecrash a Taiwan reception for its National Day and take photo’s of attendees. China is claiming that the event 'violated “the one-China principle and the relevant rules and regulations of the Fijian government”.’
Even if that were the case then protocol would be to ask the Fujian Government to intervene. By taking direct action China is showing itself in a very poor light, disregarding the norms of general life and it is likely to mean that Taiwan gets more support going forward.
For investors the threat of military action against Taiwan seems to be rising. It’s not something that can really be hedged against. The hope is that the US reliance on the technology from the likes of TSMC and others and the fact that it would not want that falling into Chinese control means that the US has a large vested interest in ensuring that China does not take military action.
Read also Opinion A distracted US is dangerous for Taiwan Sets out that China could take the opportunity of any political confusion during the post election period to make a move on Taiwan. Notes the recent increased rhetoric and aggression by China, including last week denying a Taiwan flight access to the Pratas Islands.
It does note that an invasion would require a huge force and there is no sign of that being assembled at this stage. Although in my view assemble of forces these days needs to be less centralised than in the past; with airborne troops likely to make up a significant part of the invasion force.
The article thinks it more likely that Beijing continues to try and erode Taiwanese morale. It notes 'Cutting off the Pratas islands, which have an airport and administrative buildings but no permanent civilian population, would be exactly this kind of measure. If Taiwan responds forcefully, it risks giving Beijing an excuse to hit back. But if it fails to respond, it looks powerless and suffers a symbolic defeat.'
Such are the dilemmas ahead. It concludes
'Wars between great powers — including the first and second world wars — have often broken out because governments have miscalculated each other’s reactions. As the historian Margaret Macmillan puts it: “What really becomes dangerous is when people begin to read the intentions of the other side and get them wrong.” That could easily happen over Taiwan.’
Worth also noting that a Biden victory would probably see a more united, international backing for Taiwan something that Beijing would be resistant too.

Industrial growth powers China’s recovery from pandemic. Economy expands 4.9% in third quarter as recorded virus cases remain low. Looks at yesterdays economic data. GDP missed estimates but improved QoQ. The state backed industrial boom has been working and retail sales suggest that domestic consumption is picking up too. The real question is can it continue, especially if the global economy slows again due to a resurgence in covid cases.
On the positive side the resurgence in covid cases should see demand for Chinese medical exports continue to see good demand; although demand for electronics goods which was also a big driver may not stay so strong.
Domestic consumption could be more problematic. The article quotes a number of economists who all seem to expect that the trend to continue.
This mornings House Price Index for September came in lower MoM and below expectations. Whilst the major cities are still good growth and demand the lower tier cities are still suffering and those are the cities with less resources to invest.
I think the outlook is far from clear cut. Covid in the short term still has the potential to upset the current trend. I think domestic consumers, especially in the lower tier cities will want to see good growth locally before they really start spending.
Read also Editorial China risks cementing its structural flaws An over-reliance on state investment is storing up economic trouble. Suggest that China needs a better balance between private and public investment

Beijing gives green light to HK part of Ant offering. But it still has to pass the listing hearing by the Hong Kong Stock Exchange which could take place today. It notes that the bankers are keen that the IPO does not clash with the US election.
The CSRC approval will to an extent ease some worries after the mainland regulator raised some concerns over Ant’s decision to offer retail traders access to its share sale through an exclusive arrangement on its Alipay mobile payments app.
There have also been concerns about the US placing Ant on its black list; whilst most of Ant’s revenues are from China I think the US action could have a big impact on Ant’s desire to grow internationally. In China it's dominant but outside China it is reliant on partners and the US action could restrict that.

Alibaba pays $3.6bn to take control of supermarket business. Looks at the action yesterday where it bought the controlling stake in Sun Art Retail and made a general offer. The two companies has already partnered on grocery delivery. SunArt was the first traditional grocer in China to have a profitable delivery business but covid has made it more so; although competition has increased too. The acquisition should help Alibaba grow its Freshippo chain too.
See LEX Alibaba/Sun Art: fresh meat which is positive on the deal too.

HK banks told to report security law breaches The HKMA has now published advice which suggests banks report breaches of the new national security law as they would any violation of money-laundering or terrorist financing regulations.
The Bank regulator has yet to issue official guidelines but the onus is now on the banks; which is likely to mean more work for them. To quote the article ‘...if an outspoken pro-Beijing figure were to accuse a person in Hong Kong of violating the security law, banks would be obliged to “look into it”.'

Billions at risk of pandemic squeeze on retirement pots. Workers face increased retirement age or having less income in later life. Looks at a survey by Mercer, the actuarial firm, and lead author of the Global Pension Index study.
It will come as no real surprise to most I am sure. For investors the implications are that there will be less disposable income for many people, especially in the lower income groups to spend on non essential items; which is likely to have a longer lasting impact on retailers.
The survey calls on governments to improve retirement income provision, with measures such as boosting saving among the self-employed and raising state pension ages and/or retirement ages to reflect rising life expectancy to reduce the costs of publicly financed pension benefits.
Personally I think it also highlights the increasing need for people to have multiple income streams and preferably ones that are scalable; like multilayer or network marketing which is becoming increasingly popular.

North Korea accused of pre-trial rights abuses. Looks at the testimonies recently obtained by Human Rights Watch and I doubt that they will come as a shock. But the reality is that there is really nothing that anyone can do about the situation in North Korea. Holding Kim Jong Un to account will have little impact on the ordinary people. Radical change is the only way the system is going to see change and with he current regime that is unlikely.

For Interest
The debt bubble legacy of economists Modigliani and Miller. They are known for arguing that whether companies funded themselves with debt or equity was irrelevant. Prior to that most companies had assumed that too much debt would affect the value of the firm, so their paper was a counterintuitive bombshell.
The initial theory was without real life things such as taxes, imperfect information etc but later revised and eventually became the basis of corporate creditworthiness.
The article suggest that the recent move to efficient balance sheets layered with debt now needs to be reviewed. There should be a move to resilient balance sheets; which to an extent is already being seen as investors currently favour companies with strong balance sheets. But it notes 'if this proves a fleeting phenomenon — as is likely — then more countries should start taking a hard look at the tax advantages enjoyed by debt. Such a draconian move can only be done carefully, over a long period of time. But everyone would benefit from a world where companies once again aspire to be more creditworthy.'
Nice quote “Equity is soft, debt hard. Equity is forgiving, debt insistent. Equity is a pillow, debt a sword.”
Well worth a read.

Fernandes aims to line up state backing as horizons narrow for debt-laden AirAsia
Malaysian mogul faces toughest challenge of his career with auditor raising doubts on carrier’s outlook. Looks at the issues facing the carrier but notes the low-cost model is likely to survive. A good read.

Polymetal chief calls for common ESG metrics. Complains that at present a lot of ESG is just box ticking rather that really looking at what happens on site. Cites Rio Tinto that scored well on ESG but then destroyed two ancient Aboriginal rock shelters in Australia. Highlights that ESG still has a long way to go but at least it is travelling in the right direction.

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