WSJ : China Is Becoming a Problem for Investors

China Is Becoming a Problem for Investors
U.S.-listed companies that do a lot of business in the country have struggled

China has long been a source of stock-market optimism. Now it is turning into a reason for worry.

Investors started the year by pouring money into China-focused funds, a bet that the end of Covid-19 restrictions would unleash supercharged spending in the world’s second-largest economy. Instead, a stubborn lack of growth and escalating political tensions with the U.S. are fostering poor returns and uncertainty about the future.

For investors in some heavyweight U.S. stocks—including Apple and Nvidia—the country suddenly doesn’t look as promising.

“Reopening has been disappointing for everyone,” said Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “There wasn’t much pent-up demand in anything besides domestic travel.”

Now investors are looking elsewhere and have pulled $1.6 billion from China-focused mutual and exchange-traded funds in 2023, according to data from Refinitiv Lipper. Total net assets in those funds are at $21.6 billion, down one-third from their peak in 2021, because of outflows and weak performance.

Underpinning China’s lackluster economy is a slumping housing market and the growing prospect of default by one of the country’s major developers. Recent data also showed activity in the country’s manufacturing sector contracted in October.

That backdrop has investors wondering whether consumers will give priority to paying down their debt over making new purchases, prolonging the economy’s weakness.

“If your business depends on selling to the Chinese consumer, we know there’s headwinds involved with that,” said Scott Ladner, chief investment officer at Horizon Investments.

U.S.-listed companies that do significant business in China have struggled. The Nasdaq Golden Dragon China Index, which tracks 79 consumer-oriented companies including Alibaba, rose sharply to start 2023 but is now down 4.5% for the year. The Nasdaq Composite, meanwhile, is up 30% in 2023.

Shares of Yum China, which operates KFC and Pizza Hut restaurants in the country, fell 15% in New York last Wednesday, after executives said consumer demand softened in September and October. Shares of Estée Lauder also tumbled after the cosmetics company warned that high-end beauty product sales in China were slow to recover.

Apple said revenue from China fell 2.5% to $15.1 billion in the three months that ended in September.

Companies are facing more government pressure as well. In China, government officials were recently banned from using iPhones at work. In the U.S., new export controls could force chip maker Nvidia to cancel orders from China worth billions of dollars, The Wall Street Journal reported last week.

Nvidia shares have tripled this year, while Apple has advanced 40%.

Some investors said it is possible that Chinese policy makers will pursue a fresh round of economic stimulus that could lead to a sharp rally in China-focused stocks. But they questioned whether such moves could spark lasting improvements.

“You’d just be pulling future economic growth forward in that scenario,” said Tony Roth, chief investment officer at Wilmington Trust.

FT : Ron DeSantis’s biggest donor is considering backing Donald Trump

Ron DeSantis’s biggest donor is considering backing Donald Trump
Space-exploring property baron Robert Bigelow says Florida governor is not the ‘commander’ US needs

Ron DeSantis’s biggest donor is considering switching his support to Donald Trump, in a sharp rebuke of the Florida governor’s White House aspirations.

Robert Bigelow, a Nevada real estate investor who has funded space exploration and research into paranormal activities, gave over $20mn to the DeSantis campaign earlier this year, the largest donation to any 2024 candidate, according to the latest federal filings.

But Bigelow criticised DeSantis for running a weak campaign — and said Hamas’s attack on Israel last month showed the US needed a “streetwise” leader such as Trump.

“I’ve got to look at who would probably be the strongest commander, with the most experience . . . And that’s only one guy,” Bigelow told the Financial Times.

“Who would you want as a commander? I’d want somebody that would be a hell of an ass kicker if he needed to be,” he said. “On the face of it, you lean toward Trump.”

Bigelow also said he thought Trump would now defeat DeSantis to win the Republican presidential primary — provided he stayed out of jail.

“I think Trump is too strong,” Bigelow said. “I think Trump has the momentum, the inertia, to beat him.” Trump was a “bull”, Bigelow added, but DeSantis was “dinner”.

The comments come just ahead of the Republican party’s third primary debate, in Miami, where the candidates will try to gain some momentum in their attempts to catch frontrunner Trump, who will not attend.

Recent polls of likely Republican voters put the former president about 30 points ahead of his rivals in the early 2024 primary contests. DeSantis and former UN ambassador Nikki Haley are fighting for second place.

While DeSantis received a boost to his White House bid this week after clinching the endorsement of Iowa governor Kim Reynolds, the Florida governor’s campaign has struggled to gain traction this year, while Trump’s popularity has risen among Republicans despite the array of felony charges against him.

Bigelow, the founder of Budget Suites of America and Bigelow Aerospace, had warmed to DeSantis because he tried to keep Florida’s economy open during the pandemic, saying the state “epitomised the land of the free”.

In March, he saw DeSantis speak at Stoney’s Rockin’ Country, a Las Vegas venue where Bigelow likes to dance the Texas two-step, and invited the governor for lunch.

Bigelow wrote DeSantis’s campaign a cheque for $20,000,500 after hearing that someone else might chip in $20mn. “I am not going to be number two,” he said. “You’ve got to have a sense of humour.”

But his relationship with DeSantis started to crack after the governor signed a Florida bill in April banning abortion past six weeks of pregnancy.

“Six weeks, she just found out she’s pregnant, the odds are,” Bigelow said. “It’s a sham. It’s make-believe. It’s condescending.”

After he publicly criticised DeSantis for the law in August and threatened not to give him more money, Bigelow said he expected the governor to contact him. But it was DeSantis’s wife Casey who called, two weeks later.

“Not having him bothering to call me for an explanation taught me that he’s more of a user of people, actually, and that I didn’t matter enough for him to pick up the phone,” Bigelow said.

DeSantis had also become “way too focused on conservatism”, while Trump was more socially moderate, Bigelow said. DeSantis was also less willing to engage in the rough and tumble of US election politics, he added.

“If he’s going to be in the gutter and you want to beat him, you better be willing and ready and able to go in the gutter too,” said Bigelow, referring to the former president. “You better be able to kill — and that’s not who Ron is.”

Asked for comment, a DeSantis spokesperson referred to the governor’s comment to NBC in August: “If I had a nickel for every naysayer I’ve had in my life, I’d be a very, very wealthy man.”

The 79-year-old property tycoon spoke to the FT over four hours in his compound in Las Vegas, describing his belief in the existence of extraterrestrial beings and that human consciousness survives death.

Bigelow once owned Skinwalker Ranch, a hotspot for believers in paranormal activity. He spent hundreds of millions of dollars on Bigelow Aerospace, launching two spacecraft with Russian partners, and investigated claims of UFOs for a once-secret Pentagon programme. In 2016, Elon Musk’s SpaceX attached his Bigelow Expandable Activity Module to the International Space Station, where it remains in orbit.

“Politics is just something you have to suffer,” Bigelow said. “Space is a lot of fun.”

>>> US After Hours Summary: Busy earnings session; UPWK +17.8%, PETQ +14.4%, KD

After Hours Summary: Busy earnings session; UPWK +17.8%, PETQ +14.4%, KD +12%, LZ +10.2%, ODD +9.5% higher on earnings; SNBR -27.6%, UPST -21.9%, LPRO -20.6%, INSP -17.8%, TOST -17.7%, EBAY -6.4% lower on earnings

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: UPWK +17.8%, EOLS +14.5%, PETQ +14.4%, KD +12%, ENVX +11.1% (also its IoT & Wearable cells outperformed competitive cells), LZ +10.2%, ODD +9.5%, MQ +9%, PWSC +8.4%, MNKD +7.4%, PRIM +7.4%, METC +6.8%, GPRO +6.7%, AGTI +6.2%, MRC +5.6%, BBAI +5.5% (also to acquire Pangiam for $70 mln), DVA +5.3%, ANGI +4.8%, ZLAB +4.8%, ATEN +4.4% (also authorizes new $50 mln share repurchase program), VCYT +4.1% (also enters into a multi-year agreement with ILMN), GMED +4%, AKAM +3.8%, RIVN +3.7% (also increases FY23 production guidance), AXON +3.5%, FNA +3%, INGN +2.5%, VTEX +2.5%, BROS +2.1%, VTRS +1.9%, EXR +1.6%, CARG +1.3% (also authorizes new $250 mln share repurchase program; also to acquire remaining minority interest in CarOffer for $75 mln), OXY +1.1% (also BLK will invest $550 mln on behalf of clients in the development of STRATOS), TKO +1.1% (also The CW Network to become the exclusive broadcast home to WWE NXT), WTI +0.9%, PGNY +0.8%, PR +0.7%, JKHY +0.4%, INTA +0.3%, HRB +0.2%, USPH +0.2%, NHI +0.1%, TVTX +0.1%, AGO +0.1% (also names new CFO and COO), JHX +0.1%

Companies trading higher in after hours in reaction to news: KRMD +9.5% (receives FDA clearance for FREEDOM60), AMR +6.3% (to join S&P SmallCap 600), BALY +4.2% (several insider purchases disclosed), AMBC +3% (hires external advisors to discuss options for Ambac Assurance), AMEH +2.6% (to acquire assets relating to Community Family Care), WISH +1.7% (to explore strategic alternatives, also reports earnings), HPQ +0.6% (increases dividend), OGN +0.6% (FDA accepts sBLA for interchangeability designation for HADLIMA), AMGN +0.5% (presents new research in early psoriatic arthritis; also new data from its Phase 2 study evaluating dazodalibep), AMZN +0.2% (to develop ‘Olympus' AI, according to The Information), FG +0.1% (increases dividend), AJG +0.1% (to acquire The Evans Agency)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: NRDY -35.4%, ESTA -28.4%, SNBR -27.6%, EXFY -23%, UPST -21.9%, LPRO -20.6%, INSP -17.8%, TOST -17.7%, ARRY -13.7%, POWI -13.6% (also increases dividend), FLYW -12.9%, CTKB -12.8%, ANDE -10.2%, HOOD -9.3%, MRVI -9.2%, BMBL -6.8% (also increases share repurchase program to $300 mln), AMRK -6.6%, EBAY -6.4%, KVYO -6.1%, OSUR -6.1%, CPNG -5.6%, MRCY -4.8%, KIND -4.7% (also announces 25% workforce reduction), DAR -4.6%, LCID -4.2% (also names COO; also stock offering by selling shareholders), SHLS -3.9%, PAAS -3.4%, MASI -3.2%, IAC -3%, IRBT -2.9%, APLE -2.8%, CBAY -2.4%, DNLI -2.3%, CTOS -2.1%, IOVA -2.1%, CRSR -1.9%, GO -1.7%, DOOR -1.5%, DVN -1.5%, GILD -1.4%, RXT -1.4%, CIVI -1.3%, FNF -1.3%, GXO -1.3%, CAVA -1.1%, CRCT -1%, MWA -0.9%, MOS -0.7%, RCUS -0.3%, COTY -0.2%, STE -0.1%, XPOF -0.1%

Companies trading lower in after hours in reaction to news: SPR -15.3% ($200 mln stock offering; also files mixed shelf securities offering), INZY -5% (files $300 mln mixed shelf securities offering), IDA -4.4% ($260 mln stock offering), OCUL -3.5% (files $300 mln mixed shelf securities offering), CLDX -3% (stock offering), RIOT -2.7% (reports Oct production), SRE -2% ($1 bln stock offering), BRP -2% (files mixed shelf securities offering), ARVN -2% (files mixed shelf securities offering), ILMN -1.4% (enters into a multi-year agreement with VCYT), BLK -0.5% (to invest $550 mln on behalf of clients in the development of STRATOS), ABNB -0.4% (discloses update on Italy tax order), NBHC -0.1% (increases dividend

>>> US Close Dow +0,17% S&P +0,28% Nasdaq +0,90% Russell -0,28%

Closing Stock Market Summary
Like yesterday, relative strength in the mega cap stocks propelled the major indices to close with gains. The Vanguard Mega Cap Growth ETF (MGK) climbed 1.0%, the Nasdaq Composite rose 0.9%, and the market-cap weighted S&P 500 rose 0.2%.

The broader market saw some selling activity, but remained resilient overall. The equal weighted S&P 500 declined only 0.2%.

A drop in market rates, short-covering activity, and/or a fear of missing out on further gains in this seasonally strong period for the market presumably acted as support for equities.

The 2-yr note yield fell two basis points to 4.92% and the 10-yr note yield fell nine basis points to 4.57%. These moves follow a decent 3-yr note auction, along with some weak economic data for September out of Europe that featured a 1.4% month-over-month decline in industrial production in Germany and a 12.4% year-over-year decline in PPI for the eurozone.

Notably, the rate-sensitive utilities (-0.7%) and real estate (-0.9%) sectors still declined today despite the drop in yields. The materials (-1.9%) and energy (-2.2%) sectors were also some of the worst performers. The latter was sliding alongside oil prices ($77.33/bbl, -3.77, -4.7%), which appeared to be reacting to growth concerns more so than geopolitical angst.

The consumer discretionary (+1.2%), information technology (+1.1%), and communication services (+0.6%) sectors closed at the top of the leaderboard, benefitting from gains in mega cap components.

Growth stocks were another source of support for the broader market, drafting off the big move in cloud applications provider Datadog (DDOG 102.20, +22.65, +28.5%) following its earnings report.

On a related note, Uber (UBER 49.92, +1.78, +3.7%) and NXP Semi (NXPI 185.80, +3.00,+ 1.6%) were standout winners after reporting earnings.

  • Nasdaq Composite: +30.3% YTD
  • S&P 500: +14.0% YTD
  • Dow Jones Industrial Average: +3.0% YTD
  • S&P Midcap 400: +0.7% YTD
  • Russell 2000: -1.6% YTD

Reviewing today's economic data:
  • September Trade Balance -$61.5 bln ( consensus -$60.1 bln); Prior was revised to -$58.7 bln from -$58.3 bln
    • The key takeaway from the report is that there was strength in% both imports and exports in September, demonstrating the continued strength of the U.S. economy and the appeal of U.S. goods abroad at a time of softening global demand.
  • Consumer credit increased by $9.0 bln in September (consensus $9.0 bln) after decreasing a downwardly revised $15.8 bln (from -$15.6 bln) in August.
    • The key takeaway from the report is that tighter lending standards and reduced borrowing needs in the face of higher interest rates have slowed the pace of credit expansion, particularly for nonrevolving deb.

Wednesday's economic calendar features:
  • 7:00 ET: Weekly MBA Mortgage Index (prior -2.1%)
  • 10:00 ET: September Wholesale Inventories ( consensus 0.0%; prior -0.1%)
  • 10:30 ET: Weekly crude oil inventories (prior +0.774 mln)

FT : Ceres Power/hydrogen: hype bubble needs plenty of time to reflate

Ceres Power/hydrogen: hype bubble needs plenty of time to reflate
UK companies that help produce hydrogen will remain niche investments for a couple more years

Hydrogen is 14 times lighter than air. But market forces have brought any stocks related to the gas back to earth with a thud.

A hydrogen hype cycle in early 2020 lifted the market capitalisation of companies such Ceres Power close to that of FTSE 100 utility Centrica. Ceres, worth £2.7bn in early 2021, today is just £419mn.

Ceres has created technology that can produce hydrogen from steam. Its first 1 megawatt electrolyser will shortly be shipped to a Shell research and development centre in India, it said on Tuesday.

This is not the turning point for Ceres. The solid oxide electrolyser is just a prototype. Its fuel cell technology — which turns hydrogen and oxygen into electricity — is more advanced. But it does not intend to manufacture either product.

Ceres licenses its technology and hopes to reap royalties from manufacturing partners. It thus has a less capital-intensive business than say local peer ITM Power which does make its equipment.

Germany’s Bosch and South Korea’s Doosan are early fuel cell partners for Ceres. Both have factories due to open next year. However, a hoped-for joint venture in China is yet to materialise, despite agreeing basic terms last year.

Its growth investment rose 67 per cent last year to £58.4mn, including £12.4mn in capital expenditure as it developed its electrolyser prototype. This should soon peak. Meanwhile revenues, £22.1mn in 2022, are forecast to nearly triple by the end of 2025 as Ceres hopes to start receiving royalties. It should turn a profit in 2027, according to Visible Alpha estimates.

Cash should not be a concern for Ceres, though. It raised £181mn in early 2021. At the end of June, cash stood at £161mn. Though it should get through about £50mn this year, that pace will fall in coming years.

Cleanly produced hydrogen will be needed in large quantities to meet 2050 net zero targets. Even so, UK companies that help produce it will remain niche investments for a couple more years yet.

FT : Tech groups fear new powers will allow UK to block encryption

Tech groups fear new powers will allow UK to block encryption
Signal president urges ministers to clarify provisions in proposed legislation

Tech groups have called on ministers to clarify the extent of proposed powers that they fear would allow the UK government to intervene and block the rollout of new privacy features for messaging apps.

The investigatory powers amendment bill, which was set out in the King’s Speech on Tuesday, would oblige companies to inform the Home Office in advance about any security or privacy features they want to add to their platforms, including encryption.

At present, the government has the power to force telecoms companies and messaging platforms to supply data on national security grounds and to help with criminal investigations.

The new legislation was designed to “recalibrate” those powers to respond to risks posed to public safety by multinational tech companies rolling out new services that “preclude lawful access to data,” the government said.

But Meredith Whittaker, president of private messaging group Signal, urged ministers to provide more clarity on what she described as a “bellicose” proposal amid fears that, if enacted, the new legislation would allow ministers and officials to veto the introduction of new safety features.

“We will need to see the details, but what is being described suggests an astonishing level of technically confused government over-reach that will make it nearly impossible for any service, homegrown or foreign, to operate with integrity in the UK,” she told the Financial Times.

Previously, Meta and Apple, which offer encryption on WhatsApp, and iMessage and FaceTime, respectively, have warned that they will remove any services from the UK if the government seeks to compromise those features.

Meta plans to extend encryption, which prevents anyone other than the users communicating with each other from accessing the messages, to Facebook Messenger by the end of the year.

The messaging platforms have tens of millions of users in Britain.

Whittaker said it was “imperative” for tech groups to improve privacy settings to “defend core technical infrastructure from hackers and other hostile actors”, which was “clearly not comprehended by those behind these changes”. 

She added that the “lack of judicial due process” from the government was “deeply alarming”, although “sadly not out of character”.

TechUK, a trade group, warned in its response to the government’s consultation that new investigatory powers legislation as envisaged could oblige companies to comply with a warrant from the Home Office to hand over user data even while a review into the appropriateness of the request is ongoing.

Julian David, chief executive of TechUK, said that the Home Office had “simply not engaged sufficiently with businesses” over the legislation, “driving concerns that changes to the regime could be expansive and disproportionate”.

He added: “This must be rectified at the earliest opportunity to ensure that any changes . . . are effective, informed and focused on addressing any capability gaps the Home Office is able to evidence.”

The threats to remove services come amid a wider sector backlash against a range of government policies, which tech groups say threaten to undermine the privacy and the integrity of their products, including the online safety bill, which passed into law last month.

Apple warned the government in its response to the consultation on the proposed legislation in July, that certain elements of the investigatory powers bill could force tech companies “to publicly withdraw critical security features from the UK market, depriving UK users of these protections”.

WhatsApp has also threatened to exit the UK if forced by the government to break encryption.

The Home Office said the bill would “deliver urgent and targeted changes needed to protect the British public from criminals . . . by enabling intelligence agencies and law enforcement to keep pace with these evolving threats”.

It added: “We have always been clear that we support strong encryption where public safety is designed in, but this cannot come at a cost to public safety and we will not outsource the security of our citizens to unaccountable multinational companies.”

Meta declined to comment. Apple did not respond to a request for comment.

FT : Iran’s interests are trumping the Palestinian tragedy

Iran’s interests are trumping the Palestinian tragedy
Tehran is staring at the very real prospect of confrontation with the US and Israel — and appears to have quietly decoupled its interests from those of the Palestinians

Lebanon, and perhaps much of the world, breathed a sigh of relief on Friday when Hassan Nasrallah, leader of the powerful Lebanese paramilitary group Hizbollah, finally spoke after four weeks of silence. He sounded like a warrior but didn’t declare war. Lebanon would be spared all-out confrontation with Israel — for now. Many Palestinians felt betrayed, not out of a desire for more conflict, but out of desperation for some back-up amid the devastating Israeli pounding of Gaza.

But Nasrallah’s speech was an opening gambit in Tehran’s negotiations with the US for its future place in the region, at a critical juncture not only for the Middle East but for the Islamic Republic. Tehran’s top priorities are regime stability, amid domestic political and economic pressures, safeguarding as many of its regional assets as possible and ensuring a smooth succession for the 84-year-old Supreme Leader Ali Khamenei when the time comes.

Iran has spent the past 44 years using the Palestinian cause to advance its own interests and enhance its standing with Arabs — it promises to liberate Jerusalem by using proxies to attack Israel far from its own borders, threatens America and generally plays a disruptive role. But the Palestinian element of the strategy appears to have run its course after Hamas’s incursion into Israel on October 7 brought not only retaliatory wrath down upon Gaza, but also the largest US military build-up in the region in decades.

Whether Iran knew of Hamas’s plans or not, it seems not to have anticipated the scale of the operation and the backlash. Tehran is suddenly staring at the very real prospect of direct confrontation with the US and Israel — and it appears to have quietly decoupled its interests from those of the Palestinians.

Over the past year, both Nasrallah and the head of Iran’s Quds Force, Esmail Qaani, spoke of co-ordinating Iran’s proxies and unifying fronts against Israel. But in his speech, Nasrallah said the Hamas operation was “the result of a 100 per cent Palestinian decision”. So much for unity.

This of course conveniently helps avoid direct retaliation. But Nasrallah added that those who thought the operation or its timing served Iran’s interests were wrong. Tehran is setting its own course.

Last month, Khaled Meshaal, a top Hamas official, complained that the group had expected more support from Hizbollah. But when he spoke, Nasrallah made clear the cavalry wasn’t coming. Iran views Lebanon as a forward defence base with Hizbollah as a key line of defence should the regime come under direct threat — it cannot sacrifice this asset for the Palestinians.

Instead, Tehran will increasingly poke America in Syria and Iraq while Hizbollah will do just enough from southern Lebanon to show it is helping Hamas. Sixty-one Hizbollah fighters have already been killed, a high number that has shocked their base, considering the low-intensity warfare on the border. Nasrallah explained it away by claiming that Hizbollah’s tactics are keeping one-third of Israel’s army busy on its northern border.

Nasrallah did warn escalation was possible if the war on Gaza doesn’t stop or if Israel oversteps the rules of engagement with Hizbollah. Nasrallah understands the rhythm of war well. He knows no US administration has ever called on Israel to cease fire within days or even a couple of weeks of a conflict erupting. He chose to speak after four weeks and more than 10,000 Palestinian deaths, his warning conveniently coinciding with President Joe Biden’s first call for “tactical pauses”. Israeli prime minister Benjamin Netanyahu now appears to have tacitly agreed to such pauses.

There are now two wars evolving in parallel: the direct one between Hamas and Israel, and the indirect one waged by Tehran. This also means parallel tracks of diplomacy: the first is the immediate urgent task of protecting Palestinian civilians, releasing Israeli hostages, bringing in aid to Gaza and reaching a ceasefire. Biden has also put the peace process and a two-state solution back on the agenda. But the longer Israel’s attack on Gaza continues, even with pauses, the harder it will be for Arabs to engage and for Saudi Arabia to salvage efforts at normalisation.

Iran also benefits from the war dragging on. It may be in a tight spot now but it is adept at turning moments of jeopardy into opportunity. This weekend, Nasrallah will speak again while Iran’s president, Ebrahim Raisi, will make his first visit to Riyadh to attend the summit of the Organisation of Islamic Cooperation. The Saudis should ask Raisi not just what Iran wants but what it’s willing to give up, from Lebanon to Iraq.