Asia Market Update: Asia trades mostly higher amid Japan holiday, chipmakers trade generally higher; US equity FUTs rise after prior decline
General Trend:
- Gainers in Australia include commodity-related firms; Consumer and Financial shares lag
- Property and Financial indices drop in HK, large-cap tech rises; HK TECH Index FUTs decline over 2.5% after launch; Cathay Pacific declines on the delay related to the HK/Singapore ‘travel bubble’
- Financial and Industrial firms are among the gainers in Shanghai; Kweichow Moutai rose over 4% after affirming its FY outlook; IT sector lags; Banks rise as officials addressed recent corp. defaults
China Corp. Debt Update: China’s Financial Stability Committee meeting addressed the topic of corp. defaults; Yongcheng Coal (state-owned) said to be in debt talks; Tsinghua Holdings' bonds halted after price rise; Brilliance China Auto downgraded by Dagong after recent defaults; China Merchants Securities said to now face probe related to Brilliance China
- Asian chipmakers trade generally higher; UMC rises over 9% amid press speculation; South Korean -chipmakers rise after broker comments, SK Nov 1-20th chip exports +21.9% y/y
- NZ retail sales had record q/q growth in Q3
- Australia prelim Nov PMI data rises m/m
- Singapore gave its initial 2021 GDP growth forecast
***Headlines/Economic Data***
Australia/New Zealand
-ASX 200 opened +0.2%
- (NZ) NEW ZEALAND Q3 RETAIL SALES EX-INFLATION Q/Q: 28.0% V 19.0%E (largest increase on record)
- (AU) AUSTRALIA NOV PRELIM PMI MANUFACTURING: 56.1 V 54.2 PRIOR (highest level since Dec 2017, 6th consecutive month of expansion)
- (AU) Reserve Bank of Australia (RBA) Offers to buy A$2.0B in Govt bonds v A$3.5B prior week (buys 4 and 8 year skips 3 year bonds)
Japan
-Nikkei 225 closed for holiday
- (JP) Japan PM Suga: Will introduce policies to strengthen economic recovery; Reiterates to create financial center in Japan, will press on mobile fees until public sees change
Korea
-Kospi opened +0.3%
- (KR) South Korea reports 5th day with cases over 300, to implement stricter virus restrictions – Yonhap
- 034220.KR Signed a deal with Panasonic to supply its transparent organic light emitting diode (OLED) panels - Yonhap
-(KR) South Korea sells 20-year bonds, Avg yield 1.680% v 1.620% prior
China/Hong Kong
-Hang Seng opened +0.8%; Shanghai Composite opened +0.2%
-(CN) China Financial Stability and Development Committee: Will have a zero tolerance approach to bond defaulters, will punish all kinds of “debt evasion” to protect investors - Xinhua
- (CN) US Commerce Department said to be close to declaring 89 China aerospace and other companies as having ties to China military - Press
- (CN) China PBOC sets Yuan reference rate: 6.5719 v 6.5786 prior
- (CN) China PBoC Open Market Operation (OMO): Injects CNY40B in 7-day reverse repos v Injects CNY80B in 7-day reverse repos prior; Net inject CNY40B v Net drain CNY80B prior
- (HK) Hong Kong, Singapore travel bubble launch delayed 2 weeks due to spike in COVID cases (was supposed to start Nov 22)
- (CN) Analysts note that recent bond defaults in China are not causing contagion in other markets, so far contained to onshore credit market
-3333.HK Follow Up: Largest strategic investor, Shandong Hi-Speed, exited investment in unit, Hengda; in response 2 local govt backed companies made CNY30B investment - US financial press
-(CN) China looking at policy and financial incentives under its 2021-2025 plan that will encourage couples to have children - China press
Other
- G20 draft statement: Pledge to fund fair distribution of covid-19 vaccines
- (SG) Singapore Q3 Final GDP (seasonally adjusted) Q/Q: 9.2% v 9.5%e; Y/Y: -5.8% v -5.5%e; Guides 2021 GDP +4-6%
- (SG) Monetary Authority of Singapore (MAS) Official: Monetary policy remains appropriate
- (SG) Monetary Authority of Singapore (MAS): Has enhanced CNY liquidity via CN25B initiative for banks
North America
- (US) HHS Operation Warp Speed chief Slaoui: There is enough coronavirus vaccine doses from Moderna and Pfizer to immunize about 20M Americans during December – NBC
- PFE Reportedly COVID vaccine might get UK approval by Nov 29th - The Telegraph
- (US) President Elect Biden expected to announce Cabinet picks Tuesday, Nov 24th: Expected to name Blinken as Sec of State and Jake Sullivan National Security Adviser
-(US) Nevada to limit casinos to 25% of capacity set by fire codes (Prior restrictions were 50% of capacity)
Europe
- (UK) Brexit deal said to be 95% agreed; Legal text of agreement to be finalised in 'almost all areas, covering almost all subjects' - Sky News
- (UK) PM Johnson reportedly to announce up to a week of eased COVID-19 restrictions for Christmas (from Dec 22nd to Dec 28th) - Sky News
- (FR) France Pres Macron said to announce 3-steps plan to ease lockdown measures in his address to nation on Tue, Nov 24th - press
-(IE) ECB's Lane (Ireland, chief economist): Reiterates EU Emergency bond purchases will continue
***Levels as of 12:15ET***
- Hang Seng -0.1%; Shanghai Composite +1.2%; Kospi +1.8%; Nikkei225 closed; ASX 200 +0.3%
- Equity Futures: S&P500 +0.2%; Nasdaq100 +0.4%, Dax +0.6%; FTSE100 +0.4%
- EUR 1.1879-1.1852; JPY 103.86-103.72; AUD 0.7328-0.7299; NZD 0.6964-0.6927
- Commodity Futures: Gold 0.0% at $1,872/oz; Crude Oil +0.2% at $42.50/brl; Copper -0.1% at $3.28/lb
Sunak plays down risks of ‘no trade deal’ Brexit
Negotiations could drag on into December after talks interrupted by Covid
Rishi Sunak, the chancellor, has played down the impact of a “no trade deal” Brexit, ahead of the resumption of virtual talks between the EU and UK this week to try and strike a final agreement.
Mr Sunak declined to say what modelling the Treasury had conducted on the economic impact of leaving the EU without a trade deal when Britain’s transition period ends on January 1, suggesting the effects would mainly be in the short term.
While the chancellor said it was hard to be “precise” about the negative short-term impact — including on sensitive sectors like the automotive industry — he said it would be dwarfed by the economic impact of Covid-19.
Some government officials believe Mr Sunak fully expects a deal to be agreed and that his comments were intended to remind EU negotiators that Britain was prepared to walk away from the talks. The chancellor said the UK would “not accept a deal at any price”.
But David Gauke, a former Treasury minister, said “history will not judge kindly” cabinet members who failed to warn of the serious economic damage a hard Brexit with no trade deal would cause.
“The ambitious among them know that to be seen to be associated with compromise on Brexit is a career damaging move,” Mr Gauke wrote on the ConservativeHome website. “They keep their heads down, content to let others challenge the prejudices of their party’s more extreme supporters.”
Mr Sunak told the BBC’s Andrew Marr programme on Sunday that “in the short term specifically and most immediately it would be preferable to have a deal because it would ease things in the short term”.
But he added: “I think the most important impact on our economy next year is not going to be from that. It’s because of coronavirus. I’m very confident about the British economy in all circumstances, and I think longer term.”
However, Anton Spisak, a former UK civil servant working on Brexit, tweeted: “True, the costs will be *most visible* in January. But the *biggest* costs will be in the medium/long term: supply chains shifted; client operations moved elsewhere; investments cancelled.”
Michel Barnier, the EU’s chief Brexit negotiator, remains in self-isolation along with senior members of his team, after one of the top EU officials involved in the talks tested positive for Covid-19 last week.
EU officials said discussions would continue in virtual format this week, with British officials hoping face-to-face talks could resume at the end of the week. Both sides remain hopeful a deal can be struck but negotiations look likely to drag into next week and possibly into December.
One EU diplomat noted that Brussels was already running into procedural complications because of the talks dragging on: there was already too little time for EU institutions to be able to translate a deal into all of the bloc’s 24 official languages ahead of a European Parliament ratification vote in the week of December 14 — the assembly’s last scheduled session of the year.
The diplomat said that workarounds were being explored, and MEPs have already indicated that they are prepared to hold a vote closer to the end of the year to buy more time for talks.
Xi’s aim to double China’s economy is a fantasy
The idea that GDP can be twice as big in 2035 faces two significant obstacles: demography and politics
Will China double the size of its economy by 2035, as President Xi Jinping proposed at a Communist party conference three weeks ago? To do so, the Chinese economy must grow annually by just over 4.7 per cent on average for the next 15 years. It grew by 6.1 per cent last year, and by 6.7 per cent annually over the previous five years.
In that context, 4.7 per cent a year seems quite manageable. But while the calculations may seem straightforward, there are economic and demographic constraints that are not.
Every country that followed the high-savings, investment-led growth model that China adopted in the early 1990s — such as Japan in the 1970s and 1980s, or Brazil in the decade before — has gone through three distinct stages. The first stage, characterised by heavy investment in badly-needed infrastructure, delivered many years of rapid but unbalanced growth. In that stage, debt grew in line with the economy because when debt mostly funds productive investment, gross domestic product grows faster than debt.
In the second stage, as each country sought to rebalance demand away from investment, typically with little success, growth remained fairly high, although now driven increasingly by non-productive investment. When this happens, total debt in the economy must grow faster than GDP. So the debt burden rose.
Finally in the third stage, the country either reached its debt capacity limits or a worried government took steps to prevent debt from rising further. Either way, the economy was forced finally to rebalance away from investment and towards consumption amid far slower, sometimes even negative, growth.
China today is clearly in the second stage. Between 1980 and 2010, Chinese GDP doubled four times, but debt levels were low and rose slowly. However, between 2010 and 2020 when GDP doubled again, China did so by tripling its total debt burden to $43tn, so that it now stands, officially, at over 280 per cent of GDP.
Assume conservatively that the relationship between debt and growth doesn’t change, and China’s debt-to-GDP ratio will have to rise to over 400 per cent by 2035 if it is to double GDP again. This is a level that would be unprecedented in history. Everywhere else, growth collapsed long before debts reached levels close to this.
China can in principle reduce its dependence on debt by shifting domestic demand from investment to consumption, as Beijing has long proposed. Yet this requires that the household income share of GDP rise from roughly 50 per cent today to at least 70 per cent.
Beijing has long wanted to do this but with limited success, despite a decade of trying. There is still little to suggest the party is willing to tackle the institutional implications of the large wealth transfer from local governments and elites to households this entails.
There is also a demographic problem. From the late 1970s, China benefited from a rapidly rising working-age population, but this reversed around a decade ago. In fact, over the next 15 years, while China’s population will grow by an estimated 1.5 per cent, its working population will decline by an astonishing 6.8 per cent, and will continue to decline for the rest of the century. To put it in context, while today there are 4.7 Chinese of working age for every equivalent American, by the end of the century there will be only 2.4.
This has economic implications. Achieving GDP growth of 4.7 per cent with a declining working population requires as much productivity growth per worker as 5.2 per cent GDP growth with a stable working population. Growth in Chinese labour productivity has in fact fallen steadily since 2010. Looking ahead, a declining working population requires that the pace of this decline in productivity drops by nearly two-thirds if China is to double GDP by 2035.
None of this means that Mr Xi’s goal is impossible, but we must recognise the constraints. Absent China discovering an entirely new engine of economic growth to absorb the huge amount of debt-financed spending that now goes into non-productive investments, China can double GDP by 2035 only under one of two conditions.
Either there is in effect no limit to China’s debt capacity, or Beijing boosts consumption by managing a massive redistribution of income to ordinary households. History suggests that the former is very unlikely, and that the latter will set off substantial and unpredictable political and social change. Either way, it is an unlikely bet.
Tesla’s Addition to S&P 500 Shows Why Indexes Are So Weird
Vast amounts of money are being shifted around based on strange and conflicting rules
Aficionados of Tesla Inc. TSLA -1.93% were celebrating last week as the electric-car maker was accepted into the S&P 500, propelling its shares up 22% in two days.
Step back from the extraordinary gains, and the fact that America’s seventh-biggest company by market value is only now to be admitted to the index of the country’s 500 most-valuable stocks is weird. But it is only the most obvious of many strange but stock-price-moving ways that indexes rumble markets. Indexes play two important but often conflicting roles: They measure broad market performance, and they are investment tools.
Start with Tesla. It will join the S&P 500 next month after a decision by the committee that oversees the index. The same committee had rejected the company in September even after it finally met the index’s qualification condition of being profitable for 12 months
Index membership really matters, because there is about $11 trillion benchmarked to the S&P, according to the company. Passive funds will have to buy tens of billions of dollars of Tesla stock—hence, the big move in price. So much money will need to move when the index is reconstituted next month that S&P is consulting on adding the car maker in two chunks.
Again, for both the passive investor and those using the index as a gauge of market performance, this is strange. Why do companies have to be profitable before they are allowed into the index? The whole point of investing passively is to leave it up to other people to decide if a company earns enough to justify its stock price. A gauge of performance should measure the profitable and the loss-makers alike. Plenty of companies are loss-making after they join the index, especially this year; it is odd that once in the club, the condition no longer applies.
David Blitzer, who retired as chairman of the S&P index committee last year, says the profitability rule was introduced around 2000 as dot-coms boomed, because a previous “going-concern” condition was seen as too vague.
Other than the profits rule, the fundamentals of a stock were almost completely ignored by the committee. Almost. “The only time valuations came up is if a stock had a big run up that no one could explain, because no one wanted to put a stock in [the index] and then have it drop 25% the next week,” Mr. Blitzer said. Tesla stock is up sixfold this year and trading at more than 100 times forecast 2021 earnings.
The profits rule is only the most glaring of many conflicts between an investor tool and a gauge of the market. Investors want anything that helps performance and eases trading, while a measure of the market should be comprehensive. The S&P 500 is by design not comprehensive, including only big stocks, but if it can exclude such a huge company as Tesla, what is it for?
The answer, according to S&P’s website, is that it “is widely regarded as the best single gauge of large-cap U.S. equities.” In the world of investment, that is pretty much all there is: If everyone uses the S&P as the benchmark, you have to pay attention. As Tesla’s move last week showed, the sheer weight of money means the S&P matters.
This has perverse effects, because other indexes, with different rules, are used elsewhere. The result is that the same stock can sit in several benchmarks, attracting money from those tracking, say the eurozone, as well as the U.S.—and contributing to the widely used futures tied to those indexes.
Consider TechnipFMC PLC. The British-registered oil-services company is the second-smallest member of the S&P by value, and so is at risk of being booted out next month to make way for Tesla. (It might also stay, as the committee isn’t forced to remove any particular company, any more than it was forced to add Tesla.)
On Wednesday, TechnipFMC—formed from the merger of French and U.S. companies—was one of the best performers in the index. It was also one of the best performers in the Euro Stoxx index, where it is classified as a French company, and in Vanguard’s popular FTSE Europe ETF, where it is also treated as French. So a diversified portfolio using benchmarks from different index providers would probably have TechnipFMC twice—neither of them in the place where it is legally based.
When index investing got going in the 1970s, this wasn’t a problem because almost all companies were listed in the country where they were registered, based and did most of their business. Globalization has broken the links, with companies shifting for tax reasons, more cross-border mergers and many multinationals doing most of their business outside their home countries.
“Where a company is listed is pretty much irrelevant in today’s situation,” says Martyn Hole, an investment director at Capital Group, whose Capital International provided the “CI” in MSCI. (They are no longer linked.) He says aside from some corporate-governance rules and governmental pressure, stock pickers should focus on where companies make their money, not where they happen to be listed.
The index providers are in a bind, sometimes focusing on listing location, sometimes on legal status, and other times on where a company does its business—in part because of what investors want.
MSCI includes foreign-listed companies in its home-country indexes where there are a lot of them, as with Israel, China and the Netherlands. There aren’t many German companies listed overseas, so German vaccine maker BioNTech SE, which IPO’d on Nasdaq, doesn’t qualify for MSCI’s German or European indexes. Because it is German, it doesn’t qualify for MSCI USA either. On the other hand, Tesla has been in MSCI’s U.S. indexes since 2010, because there is no rule on profits.
Most of these problems can be avoided by using very broad global indexes, such as MSCI All Country World or FTSE All-World, which have several large ETFs tracking them. There are still differences in which stocks qualify, notably nonvoting shares, but such an approach does at least avoid the biggest anomalies.
Investors still need to pay attention. There are vast amounts of money being shifted around based on strange and conflicting rules.
Deutsche Bank on the lookout to expand its payments business
German lender’s fledgling ‘Merchant Solutions’ unit is weighting options for potential targets
Germany’s largest lender Deutsche Bank is on the lookout for takeovers and joint ventures to help towards its goal of becoming a major force in Europe’s rapidly consolidating payments processing industry.
“Digital payments are one area with the highest strategic priority for us,” Stefan Hoops, head of Deutsche’s corporate bank, told the Financial Times adding that “non-organic growth is clearly an option . . . If an opportunity comes along we would clearly consider [it]”.
Deutsche has hired a number of external payments experts in recent months, including André Bajorat, the founder of fintech Figo, as the corporate bank’s new head of strategy.
It has also taken on some former senior managers from collapsed payment processing group Wirecard, including Kilian Thalhammer, who co-founded the specialist German blog “Payment and Banking” with Mr Bajorat.
However, it decided against acquiring Wirecard’s technology and assets. Mr Hoops declined to comment on that decision, but other people familiar with the process told the Financial Times that the price tag was deemed too high and the transaction too complex.
Instead, the lender’s fledgling “Merchant Solutions” payments processing business is weighing options for other potential targets and partners.
“One option might be a small payments processing company that is . . . struggling to meet tighter regulatory demands,” said Mr Hoops. A joint venture was also an option, he said, “for instance with someone who is big [in other markets] but not that present in Europe”.
Last year, Deutsche Bank generated just €100m in annual fees from processing digital payments. Mr Hoops has promised to double this within three years but, even then, the business would account for less than 4 per cent of the corporate bank’s annual revenue.
The new push into payments processing is a reversal of Deutsche’s 2012 decision to pull out of the business that saw it sell Deutsche Card Services to US-based EVO Payments International.
At that time, it was earning high returns from investment banking and was less interested in the unglamorous business of digital payments. Some in the bank also worried that the business was risky, dominated as it was in its early days by payments related to adult entertainment and gambling.
Over the past decade however, the market “has changed completely”, said Mr Hoops, noting that mobile payments had become ubiquitous and that the technology and control mechanisms were vastly improved.
He added that there is “no good reason why European banks left this business to other players”, noting that in the US, the market is dominated by large lenders like JPMorgan.
In Europe, Deutsche hopes expanding this line of business will give it certain competitive advantages.
As a payments processor, it could expand to settle the credit and debit card transactions made by its 19m or so retail clients, circumventing the likes of Visa and Mastercard and avoiding the fees they charge.
It could also add payment processing to its roster of existing corporate business lines, such as cash management and trade finance, to provide a more streamlined and efficient service.
Mr Hoops would not be drawn on the time horizon for the bank’s push into payments. “We will not need a decade but this won’t be finished by Christmas.” Deutsche is planning to unveil more details of this new strategy on its capital markets day in December.