Oct 27 FT Thoughts Ant, African Debt & China, China's pride on covid? and lunch updates
MARKETs at 12.15pm HK time
JAPAN opened lower following the US and tested down to 23,300 before rebounding and working higher but resistance around 23,450 about 50pts of Monday’s close. PM session opened lower, currenlty at 23,400 -0.4%
S KOREA Pre market GDP growth data showed a slight improvement. Large caps mixed with Samsun and Hynix both slightly lower. But Hyundai and Kia higher despite poor headline numbers due largely to a huge provision.
Kospi opened opened at 2,329 and tested to 2,321 before working higher and back into the green briefly, currently trading flat to Monday’s close 2,344
Kosdaq opened around the lows but has rallied strongly with resistance at 794, Currently +1.8% @ 792
GDP Growth Rate Adv Q3 -1.3% YoY vs -2.7% prior (F/cast was -1.5%)
GDP Growth Rate Adv Q3 +1.9% QoQ vs -3.2% prior (F/cast was +1.6%)
TAIWAN opened lower and traded down to 12,820 level before rebounding but resistance currently around the 12,880 level. Currently trading sideways -0.4% @ 12,868
CHINA CSI 300 opened lower Industrial Profit data was worse than F/cast but market rallied into the green on the hope of more stimulus but it was short lived and the market then trended lower to the day low of 4,672 just before lunch.
Fifth Plenum of the Nineteenth Communist Party Congress continues to Thursday.
Industrial Profits Sept (YTD) -2.4% YoY vs -4.4% Aug (F/cast was -1.6%)
Shanghai Comp traded in the same pattern at lunch -0.4% @ 3,239
Shenzhen Comp traded in a similar pattern at lunch -0.1% @ 13,178
ChiNext traded the same way as Shenzhen currently +0.45% @ 2,613
HONG KONG Market re-opened @ 24,839 -78pts vs -166pts @ 24,752 ADR's with BABA weak as Ant IPO starts but HSBC slightly up ahead fo results. Then saw choppy sideways trading initially but then around 10:15am having failed to break higher for the second time the market sold down to 24,600. It tested the support a couple of times and saw a small uptick into lunch @ -1.16% @ 24,630. At lunchtime Financials weak, E commerce mixed, Petrochems and Chinese Property weak.
HSBC +1.9% results out at lunchtime headline beat estimates Q3 pre tax profit $3.1bn -36% YoY. Good but unlike to offset the wider general weakness.
EUROPE I would expect Europe to open lower in reaction to the US sell off and with covid still a major concern.
EUROZONE Loans to Households, Loans to Companies, M3 Money Supply
GERMANY No data due
FRANCE Unemployment Benefit Claims, Jobseekers
UK CBI Distributive Trades
US Futures opened flat but have risen slightly to +20pts with S&P and NDX slightly +VE.
I would expect a weak open with covid still an overhang on the market.
AHEAD Durable Goods Orders Data, Redbook, Case Swiller Home Prices, Home Price Index, Consumer Confidence, Richmond Fed Manufacturing Index, API Crude Oil Stock Change.
Key Earnings Pfizer, Merck, Eli Lilly, Caterpillar, Stanley Black & Decker, Microsoft, AMD.
Chinese fintech group Ant to raise more than $34bn in record listing. Ma's company valued at $313bn, means the IPO to top Aramco’s $29bn via a dual HK-Shanghai offering. Looks at the IPO which values the company around the same value as JPMorgan. Many will be watching with interest as to how the issue traded on the Star board. Many large funds have already applied and then general tone is that it is a must have stock.
See also Lex Ant IPO: earth-shaking arthropod Notes that the valuation is at a steep discount to PayPal because of the 50 pages of risk in the prospectus; primarily about regulation both at home and abroad. 'Friendly relations with the party go a long way in China. But Ant still deserves credit for fintech innovations as good as anything from the US. These have reflected China’s penchant for leapfrog technology and relatively light-touch regulation. It can hardly be a coincidence that Ant is coming to market just as these dynamics are changing.'
Xinjiang battles scores of infections. Fresh coronavirus cases in heavily monitored region spur detention camp fears. Looks at how the outbreak has been contained but says it raises questions about the working conditions of those in the country. China has heavily policed the area under the premise of bringing terrorism under control in the predominantly Muslim region.
African debt to China drains poor nations. Beijing shows reluctance to fully align with global relief plans as Zambia nears default. Notes that China is the biggest bilateral lender to Africa having transferred nearly US$150bn to the region to develop its Belt and Road project. Now Zambia could be heading for default and other countries are under pressure too. That has highlighted 'Beijing’s reluctance to fully align with global debt relief plans.’
China holds about 63% of bilateral debt owed by the world’s poorest countries to G20 members, up from 45% in 2015 according the World Bank. Currently Beijing is only slowly engaging with the debt suspension initiative from the G20. Also alarmingly is the fact that many of the contracts have high interest rates and little transparency; meaning they are a major drain on many of the poorest countries.
There are some staggering amounts involved and because of the range of Chinese entities lending and the general lack of transparency it is almost impossible to know the true extent of the issue. The fact that President Xi committed to working with G20 member on the debt service suspension initiative is positive but the extent to which individual lenders engage is questionable. Some other lenders are worries about whether they will be treated as equal too Chinese lenders or whether there are special conditions that see them ranks lower. Some mention that China needs to be careful otherwise the while situation could result in a situation where the debt pile can’t be restructured and that could put risk onto the SOE’s. It is also said to serve as a warning to poor national about borrowing from China.
Not mentioned in the article but reported earlier that some lenders are concerned at the fact that some of the Chinese lenders are calling for lump sum or accelerated repayments before they will consider allowing the debt service suspension initiative. How China treats this will significantly impact how is is seem as a responsible world leader in my view. To say nothing o the potential impact to the Chinese lenders balance sheets.
Opinion China’s Covid pride could be premature. Notes that some view the current situation as China replacing the US as the worlds leading power. It accepts that China has been effective in controlling the virus and its economy looks to be rebounding nicely. Much of this is due to its authoritarian system or as President Xi Jinping said that “the pandemic once again proves the supremacy of the socialist system with Chinese characteristics”.
At the same time the US has been failed by its leadership and that has been widely reported.
It makes the point criticism of Trumps leadership in the press has not lead to arrests but by contrast last month Ren Zhiqiang, a property tycoon, was sentenced to 18 years in prison in China for his criticism of President Xi and Australia has been targeted for asking for an inquiry into how covid started.
It notes that the inability to accept criticism is a major weakness. Beijing has done well after the initial mis-handling BUT Taiwan, South Korea and other have done better which undermines Xi’s lauding of the Chinese socialist system. It also suggests that China is happier covering up than facing up and future problems may well be covered up first.
It also note how covid has undermined international goodwill towards China. The world has noticed that covid and SARs both started in China. A Pew opinion survey showed that 61% of people thought China had done a bad job of handling Covid-19 and that distrust of Mr Xi has soared.
That comes at a time when there are other challenges to the China model, covid has cut trading volumes hurting China’s export model. At the same time the US has sought to curtail China’s technological advances too. That may slow the momentum of the Chinese economic miracle that has helped the country so much recently.
Now with the leadership gathering to set out the next five year plan it is likely that Xi’s cult personality and the adoption of ‘Xi Jinping Thought’ means that plan maybe subject to weakness that open criticism could have addressed.
In summary 'The US system has had a terrible few years and the American elite is rightly going through a period of self-doubt and introspection. But regular elections offer the possibility to change course and appoint new leaders. The US can get rid of President Donald Trump — and may be about to do so. China has no mechanism to rid itself of the increasingly megalomaniacal President Xi.'
Suga pledges carbon-neutral Japan by 2050. As had been widely expected but the policy at this stage lacks details. Japan has struggled on energy ever since the Fukushima nuclear disaster in 2011 and even today continues to build coal fired power stations. People will be watching for more detailed plans to be forthcoming in the months ahead.
EU capitals hesitate over recovery fund loans. Looks at the various options EU countries have when it comes to the recovery fund. The fund comprises 'non-refundable grants, which are highly prized, and a loans programme under which the commission will in effect borrow on countries’ behalf.’ The issue is that the loans come with strings attached and whilst they might be at better rates than the individual countries could obtain, although that is not clear cut. For investors the fact that there are conditions attached means that it is going to take time for counties to decide what is the best option. Time that many small companies do not have as they wait for access to funds. The expectation is that the Southern EU countries are more likely to avail themselves of the loans (Spain, Portugal, Greece and Italy) although the burden of the interest rate repayments means that they might decide not to use them.
At this stage the article suggests that the non-refundable grants will be distributed between 2021 and 2023; so nothing is moving at anything like the speed of the spread of the virus!
Now would be a crazy time for banks to resume dividends. Looks at how after Barclays and other banks strong results and they are calling for the authorise to release them from the burdens put on then earlier to control their capital. It contrasts those strong bank results with Financial Conduct Authority’s warning 'that 12m people in the UK now had “low financial resilience”, meaning they may struggle to pay household bills and service debts.’ Which went on to say that a second wave would mean increased difficulty above the current levels.
Two contrasting views but which one is right. An interesting read.
Not mentioned in the article but I think relevant is that some people are under the low financial resilience because they are not getting the dividends that they were expecting when they planned for their retirement
Ambani takes the battle to Bezos and his ‘new East India Company’ Future Group dispute sees Reliance clash with US interloper Amazon in online retail. Looks the battle for on line shopping in India; a key market for Amazon have closed its China online operation last year.
All the president’s debt: Trump creditors in focus. Liabilities of more than $1bn are tied to the Covid-struck commercial property sector. Sets out what is know about Trump’s debts and with those tied to real estate where potential problems may lie. It also notes at the end;
'A $50m debt to Chicago Unit Acquisition Trust is secured against the Trump International Hotel and Tower in Chicago. This debt is mysterious.
The trust is a corporation owned by DJT Holdings LLC — that is, Donald J Trump. Mr Trump appears to owe the money to himself. Asked about this unusual arrangement by The New York Times in 2016, Mr Trump said: “I have the mortgage. That is all there is. Very simple. I am the bank.” But he is the debtor, too, and it is not a typical mortgage; it is a “springing loan”, meaning it only comes due under specific conditions — typically a credit event such as a decline in credit rating. It has been suggested that this arrangement could be part of a tax avoidance strategy.’
One wonders how many more unusual arrangements there are lucking out there.
Value stocks’ performance gap with growth peers reaches record levels. Another article looking at how value investing is currently going through its worse period ever!
Austerity policy shift won’t be unambiguous good news for investors. By Mohamed El-Erian. He notes that the IMF and World Banks have both radically changed their thinking on austerity and now suggests governments that can, spend their way out of covid. He doubts this will just be seen a s good new, many will be more nuanced in their views. He notes that for money spending their way out is feasible thanks to low interest rates. But he thinks that governments should be targeting people over companies, viable sectors over sunset ones etc. That will result in favour sectors over unfavoured; who are likely to then find access to capital restricted. Countries will differ and those not printing their own money will find things much thougher and require more support from the IMF and others.
'This greater dispersion in market winners and losers will come at a time when investors face difficulties in finding what they believe are reliable risk mitigators.’
Yields will be suppressed and markets will react to the outlook.
The key is that 'From a return perspective, it’s only likely to support specific sectors and companies, and in a subset of countries around the world. Elsewhere, it is likely to be insufficient to avoid the bankruptcies and debt reschedulings that accompany a global recovery that is too small, too uneven and too uncertain.’
Well worth a read and I think it compliments the previous article on why value investing is having such a poor time.