TheChek News Flow

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Outbound shipments rose 8.7% from a year earlier in August

China’s exports in August beat expectations and accelerated despite growing trade barriers, giving Beijing a little breathing room in its efforts to lift domestic demand and reawaken the anemic economy.

Outbound shipment in August rose 8.7% compared with the same period a year earlier, picking up from July’s 7.0% increase, the General Administration of Customs said Tuesday. That beat the 6.6% growth tipped by a Wall Street Journal poll of economists.

The rise in shipments sent the value of exports to their fastest on-year increase in 17 months, as export volumes reached a record high, according to Zichun Huang, an economist at Capital Economics. “Outbound shipments are likely to remain strong in the coming months,” added Huang, in a note to clients.

The export growth comes against the backdrop of rising trade barriers targeting Chinese products. In July, the European Union imposed higher tariffs on Chinese electric vehicles. The U.S. and Canada have also announced plans to impose hefty tariffs on goods from China, including EVs.

But this could be offset by rerouting trade as well as the weaker Chinese yuan, said Huang, adding that tariffs only target a small portion of China’s outbound shipments.

The growth of China’s exports to the U.S., its second-largest trade partner, accelerated to 13.4% on year in August, up from July’s 8.0%. Shipments in August to the Association of Southeast Asian Nations and EU, its No. 1 and No. 3 trade partners, slowed but still grew at 9.0% and 5.0% respectively, according to calculations made by The Wall Street Journal based on official data.

The resilience of China’s exports has delayed the need for Chinese leaders to introduce more proactive measures to address weakening domestic demand, economists say.

“The question is how long exports can stay strong given the weakening U.S. economy and the rising trade tension,” said Zhiwei Zhang, chief economist at PinPoint Asset Management.

Concerns over weak demand and potential deflation have been growing as Beijing remains hesitant to implement aggressive stimulus measures given heavy debts already incurred by local governments. Inflation data released on Monday fell short of market expectations, even though food prices were driven higher by extreme summer weather.

The lackluster domestic demand was also indicated in Tuesday’s import data. August import growth cooled to 0.5% in August, after surging 7.2% in July, official data showed. Economists had projected August imports would rise 2.5%. That widened the August trade surplus to $91.02 billion, compared with $84.65 billion in July and the $80.0 billion tipped by a WSJ poll of economists.

Economists surveyed by Journal expect major economic indicators due Saturday, including factory production, investment and consumer spending, will provide more indications that the economy continued to slow in August.

Alibaba Shares Rise on Hopes for Higher Demand From Mainland Investors

Investors in mainland China will be able to directly trade in Alibaba’s Hong Kong-listed stock via the Stock Connect program

Alibaba Group’s 9988 5.11%increase; green up pointing triangle shares surged in Hong Kong on expectations that easier access for mainland Chinese investors may boost demand for the e-commerce giant’s stock.

Shares rose 4.7% to 81.95 Hong Kong dollars, equivalent to US$10.51, early Tuesday. The stock was the top gainer on the benchmark Hang Seng Index and outperformed the index, which was recently up 0.2%.

The gains came after Alibaba Group’s Hong Kong shares were included by the Shanghai and Shenzhen stock exchanges in the Stock Connect scheme. The program links the Shanghai and Shenzhen stock exchanges with Hong Kong’s bourse, allowing mainland investors to trade eligible Hong Kong shares.

The southbound Stock Connect inclusion will attract new buying interest for the stocks from mainland-based investors, Daiwa analysts said.

Goldman Sachs analysts said in a recent note that the inclusion of Alibaba in the program could attract around US$2 billion to US$3 billion of mainland liquidity by the end of this year.

Over a two- to three-year period, total inflows could reach US$11 billion, following the liquidity trajectory of peers Tencent, Meituan and Xiaomi, the Goldman Sachs analysts said.

Alibaba is the largest company in terms of market capitalization among the 13 companies that have secondary listings in Hong Kong. As of Sept. 9, southbound shareholding accounted for 10% of Tencent’s total Hong Kong shares, 14.5% for Xiaomi and 12.8% for Meituan, according to data provider Wind.

Although Chinese equities have faced challenging market liquidity amid stricter market regulations and weak faith in the country’s economy, southbound net buying has been “exceptionally strong,” Goldman Sachs analysts said.

Alibaba’s Hong Kong shares have risen 8.0% so far this year.

Pull towards Russia and China grows stronger, says boss of Kazatomprom

Kazatomprom’s chief executive has warned that Russia’s war on Ukraine is making it harder for the world’s largest uranium producer to keep supplying the west as the gravitational pull towards Moscow and Beijing grows stronger.

Meirzhan Yussupov, chief of the Kazakh state miner, said that sanctions caused by the war had created obstacles to supplying western utilities.

“It is much easier for us to sell most, if not all, of our production to our Asian partners — I wouldn’t call [out] the specific country . . . They can eat up almost all of our production, or our partners to the north,” he told the FT.

He added however: “It’s much easier to sell to them but we don’t want to put all our eggs in one basket.”

The Astana-based miner, of which the Kazakh state owns 75 per cent, wants to keep a diverse mix of customers that includes US and European utilities, even though shipping material on the traditional, cheaper route via St Petersburg is no longer an option because of sanctions risk.

Kazatomprom, which is listed in Astana and London, has sought to establish an alternative route to ship material through the Caspian Sea, Azerbaijan, Georgia and the Black Sea, at a higher cost.

Kazakhstan produces 43 per cent of the world’s uranium, equivalent to the market share that the Opec cartel has over oil. But the potential influence of Russia over its Central Asian neighbour has been an increasing source of concern for western utilities and industry partners.

“You will see some changes,” said Leigh Curyer, chief executive of NexGen Energy, which is developing a large uranium mining project in Canada. “Perhaps their production will increase to servicing Russia and China. If that’s the case, western world utilities will look to western world suppliers . . . I think we’re already seeing signs of that.”

Rosatom, Russia’s nuclear monopoly, holds a stake in five of Kazatomprom’s 14 deposits. Under those arrangements, it receives 20 per cent of the country’s output, said Yussupov.

Adding to the challenge is that Russia and China are leading the construction of new nuclear plants globally.

In 2022, the company disclosed in a footnote in its annual report that the ownership of the company holding a 49 per cent stake in Budenovskoye, a giant deposit that Kazatomprom is developing, was transferred to entities including Rosatom’s subsidiary Uranium One. The lack of transparency over the disposal caused concerns internally, according to one person with direct knowledge of the matter.

A dozen senior Kazatomprom executives have left over the past two years, according to disclosures. Kazatomprom denied that the exodus was partly related to the stake sale.

“There is not that big a concern” about Rosatom’s level of involvement, citing lower levels of interdependence between the two countries compared with the oil and gas sector, Yussupov said.

But he also added: “There is, of course, concern”.

The chief’s comments came after the company last month downgraded its output forecast for 2025 by 17 per cent and suspended its 2026 guidance. It cited shortages of sulphuric acid, essential to extract uranium, and construction delays for surface facilities and infrastructure.

Kazatomprom sent 49 per cent of uranium under its control to the Asian market, 32 per cent to Europe and 19 per cent to the American market last year, according to its latest annual report.

“We are very serious about diversifying the geography of our sales,” Yussupov said.

Katie Mallinson, partner of Prism Political Risk Management, a business intelligence company, said that Kazakhstan had been under increasing pressure from Russia and China to restrict its interaction with western nations, particularly since US troops left Afghanistan in 2021.

“This is particularly the case for uranium, where it has a pivotal role in the global supply chain,” she said.

“Russia has increased its stake in Kazakhstan’s production of uranium and Kazakhstan has been committing more and more of its supply to the Chinese market. This is leaving serious questions in the long term as to how much uranium will be available on western markets.”

Here’s an interesting graph:

That is analysts’ one-year forward estimates for S&P 500 profit margins. It’s approaching an all-time high. There has been a lot of fretting over the cooling job market and the possibility of recession. Well, Wall Street analysts expect the good times to keep rolling.

Is this realistic? The estimates are really high! By this time next year, the consensus is profit margins in the S&P 500 will be close to 13.6 per cent, a full percentage point higher than today and close to the post-pandemic peaks of 2022. Estimates are even higher in other databases — S&P Capital IQ has expected net margins of 13.8 per cent for 2025 and 14.4 per cent for 2026.

These estimates come from sellside analysts, who might be accused of professional optimism. But to date they have been reasonably accurate. Here are actual S&P profit margins compared with estimates from a year before:

The analysts, unsurprisingly, are not great at nailing the big inflections. They were very off before Covid-19, and they did not expect companies to get a margin boost in 2021. But not a bad effort overall.

Rob remembers writing about how margins were unsustainably high a decade ago (Aiden was too busy studying for the PSATs at the time to care about margins). Time proved his worries wrong, in part because high-margin tech companies are now a bigger part of the index.

That said, analysts expect profit margins to return to the levels of early 2021, when consumers were stuck at home spending excess savings online and big companies had tremendous pricing power because of supply chain snarls. This seems a bit giddy to us. As we have written before, some companies are already seeing their pricing power erode as US consumers become choosier. And the AI cost revolution, wonderful as it may be, is not going to arrive next year. Add high expectations to your list of market risks.

Apple

Setting aside Nvidia’s mind-bending run, the Big Tech stock that has performed the best since the pandemic hit is — surprisingly, at least to me — Apple. The stock has also done very well in the latest leg of the equity rally, which began in April, as worries about resurgent inflation began to fade and rate cuts came into view:

Apple outperformed Google, Microsoft and Meta while the AI rally was hot; it got a big boost from the announcement of its partnership with OpenAI back in June. And it has increased its lead while Nvidia has plateaued and fallen.

Unhedged noted two years ago that Apple rallies with tech but doesn’t fall in tech corrections. So this phenomenon is not new. But it has only become more remarkable, because over those two years, Apple’s growth, already the slowest of the Big Tech companies, has only gotten slower:

The pattern, while interrupted by a burst of pandemic demand, is clear: growth is slowing, with each new product cycle providing less of a boost. How much of this is down to the law of large numbers and how much to a slowing rate of innovation is open for debate. But it’s a fact, and not even sellside analysts can imagine a future in which revenue grows in the double digits. 

Apple’s plan to reignite growth involves more AI, as yesterday’s iPhone 16 event emphasised. I have no idea whether this will work, but it does little to solve the fundamental puzzle: why does Apple consistently outperform its peers through market cycles while growing more slowly than they do? Clearly this has something to do with the stickiness of Apple’s revenues, which are increasingly derived from services. But as the stock’s price/earnings ratio approaches its 2021 high and touches par with Microsoft, one starts to wonder how long this can go on:

Multi-manager hedge funds suffer outflows as investor frenzy fades

Industry’s hottest sector posts first client withdrawals in seven years after weaker returns in 2023, Goldman Sachs data shows

The hottest sector in the hedge fund industry has suffered outflows for the first time in seven years, in a sign that investors who once raced to get access to so-called multi-manager funds may finally be losing interest.

Pioneered by firms such as Ken Griffin’s Citadel and Izzy Englander’s Millennium, multi-manager hedge funds house tens if not hundreds of trading teams, known as “pods”, which run a variety of trading strategies across equities, commodities, foreign exchange, credit and other markets.

These funds have pulled in tens of billions of dollars from big investors in recent years thanks to and strict risk controls and consistent returns, even in equity bear markets such as 2022.

But a report by Goldman Sachs seen by the Financial Times shows that these firms have experienced net client withdrawals of more than $30bn in the 12 months to the end of June, the first time they have suffered outflows since 2016.

This is a “significant turn in the tides”, said Goldman in the report. “There has been a turn in allocator sentiment and the flows picture reflects this lower appetite.”

The data was compiled by the prime brokerage division of Goldman Sachs, which lends money to big investors such as hedge funds to make bets in the market, and was based on a sample of 53 firms with $366bn in assets. About one-third of the $30bn figure was due to hedge funds choosing to return capital to investors.

The biggest driver of waning investor demand is that, after years of increasing their investments in the space, some allocators such as pension funds have decided that they have now invested enough, said Goldman.

But weaker returns last year have also dented investor enthusiasm, with a gap emerging last year between larger, more established players such as Citadel and Millennium, and smaller firms, some of whom did little better than the return from cash. Dmitry Balyasny’s Balyasny Asset Management and Schonfeld Strategic Advisors gained 2.7 and 3 per cent, respectively, at the end of last year.

“The average multi-manager return in 2023 was almost identical to the risk-free rate for the year,” said Goldman in the report.

The bank’s data showed that over the past year there was a 13 per cent difference in performance between some of the best and worst performing managers.

Some of the top managers in the space, such as Millennium and Citadel, have been mostly closed to new investor money in recent years, although Millennium this year has been in talks to raise potentially billions of dollars for a pot of additional cash that can be drawn upon when the firm desires, according to a person with knowledge of the matter.

The bank also attributed the waning interest to increasing charges in the sector.

The rise of multi-manager hedge funds has been fuelled by the so-called pass-through fee model, where all costs such as client entertainment, office rents and bonuses are charged directly to investors, in addition to a performance fee. That can lead to annual fees that can vary from 3 per cent to 10 per cent of assets. In contrast, hedge funds on average charge a management fee of 1.35 per cent, according to data group HFR, to cover their costs, plus a performance fee.

The high fees have enabled these firms to offer some of the most lucrative pay deals in the industry, fuelling an escalating war for talent, but it has also put pressure on these hedge funds to continue delivering returns to keep pace with their costs.

In a sign of the sector’s rapid growth, Goldman found that over the past 12 months, multi-manager hedge funds added about 2,400 new hires, with a 19 per cent and 13 per cent increase in non-investment and investment staff, respectively.

Despite a mixed year for performance last year, the picture has been far rosier this year, with firms such as Balyasny and Schonfeld delivering better returns.

The bank added that while sentiment seemed to be changing for the worse, the sector was “showing no signs of losing its importance and relevance” in the hedge fund industry.