FT Lex : Medical gloves/Malaysia: the next shortage

Medical gloves/Malaysia: the next shortage
Coronavirus illustrates the risk of concentrating production of vital supplies geographically

Hospitals around the world are struggling with shortages of critical medical supplies and equipment, such as masks and ventilators. Medical gloves will join that list. Two-thirds of the world’s supply is made in Malaysia, where the number of confirmed coronavirus cases has almost doubled in the past week. 

Global orders reached double the full production capacity of Malaysia’s glove makers last week. This came as Malaysia started a lockdown of at least one month. Factories there — if open at all — are running at less than half capacity. Orders are backed up by as much as four months.

The country’s abundant rubber plantations have meant low entry barriers for small local competitors. These in turn have kept glove prices low. That is partly why few rival countries can stretch to meet the output of about 200bn gloves Malaysia makes each year. Mask and ventilator production is more geographically diverse. 3M has several surgical mask production plants across the US and China. There are more than ten big ventilator manufacturers across the world.

Seasonal factors have made things worse. The price of key input latex rose 5 per cent in December due to a decline in rubber yields from rubber tree bark during the winter. Those prices are likely to stay high, as demand grows. Labour costs, which have increased since last year, should rise further as a proportion of workers stay at home.

No surprise then that the share price of Top Glove — Malaysia’s largest producer — has soared 37 per cent this year. At a record 34 times forward earnings it trades well above local and regional rivals reflecting the surging demand. Its sales have nearly tripled in the past week. Analysts already expect a 35 per cent boost in operating profit in the year to August. Even after the outbreak ends, demand should stay high, as medical departments worldwide replenish their depleted stock.

Coronavirus is painfully illustrating the risk of concentrating production of vital supplies geographically, or in the hands of a few manufacturers. Comparative advantage has shown it has unexpected costs for customers. After the epidemic, nations will ensure greater security of supply.

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance:

  • N/A

Other news:

  • MITT -21.27% (provides financial update as of March 27)
  • AXSM -20.18% (topline results of the stride-1 phase 3 trial)
  • ING -8.94% (COVID-19 update)
  • CUK -8.70% (Suspends cruises until May 15)
  • CCL -7.91% (in sympathy with CUK)
  • NCLH -7.49% (in sympathy with CUK)
  • RCL -5.77% (in sympathy with CUK)
  • USO -5.37% (Energy name trading lower with Crude oil)
  • PENN -4.16% (announces an agreement with its principal landlord; withdraws guidance)
  • RWT -3.38% (delays payment for Q1 dividend)
  • NYMT -3.14% (provides business update as of March 27)
  • LAD -2.96% (provides operations and liquidity updates)
  • DVN -2.23% (revises Cap-ex outlook)
  • ABB -1.86% (business update)
  • XOM -1.62% (Energy name trading lower with Crude oil)
  • XLE -1.62% (Energy name trading lower with Crude oil)
  • HAL -1.25% (Energy name trading lower with Crude oil)
  • BRKR -1.00% (suspends FY20 guidance)

Analyst comments:

  • GT -8% (downgraded to Neutral from Outperform at Exane BNP Paribas)
  • MAR -2% (downgraded to Sector Perform from Outperform at RBC Capital Mkts)
  • PII -1.3% (downgraded to Market Perform from Outperform at BMO Capital Markets)

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance:

  • CALM +1.1%

Other news:

  • ABT 8.50% (launches molecular point-of-care test to detect Coronavirus in five minutes) \
  • SCS 6.00% (producing masks, facial shields, social screens to fight virus)
  • WMC 4% (suspends Q1 dividend)
  • GM 4% (receives order from Trump to produce ventilators under the Defense Production Act)
  • ASML 3% (Co update)
  • LMNX 3% (confirms receipt of FDA Emergency Use Authorization for NxTAG CoV Extended Panel)
  • MDT 2.50% (Medtronic's Evolut TAVR System demonstrates Low rates of paravalvular leak and high survival observed in late-breaking clinical trial)
  • MTW 2% (provides business update)
  • WORK 2% (following CEO on CNBC on Friday)

Analyst comments:

  • TJX 1.50% (upgraded to Overweight from Equal Weight at Wells Fargo)
  • ULTA 1.18% (upgraded to Overweight from Equal Weight at Wells Fargo)
  • CERN 0.82% (upgraded to Outperform from Market Perform at Cowen)
  • PG 0.75% (upgraded to Buy from Hold at Jefferies)

9to5 : Foxconn’s iPhone 12 production ‘on schedule’ but supply-chain doubts rema



IPHONE 12 FOXCONN


There has been much speculation lately about whether or not Apple will need to delay iPhone 12 production, either due to supply-chain difficulties or over fears that demand won’t be there by the fall.
A new report today says that Foxconn’s iPhone 12 production remains on schedule, though there do remain doubts about upstream suppliers when it comes to mass-production in the summer …
Background
Doubts were crystallized last week when a Nikkei report said that Apple was considering delaying the launch beyond September.
Apple is said to be considering a delay to its planned launch schedule for the next-generation range of iPhones. The 5G iPhone, widely referred to as the ‘iPhone 12’ series, was apparently meant to ship in September according to a report from Nikkei.
However, the current global climate has led Apple to discuss if it should delay the phone by a few months. In addition to the obvious supply constraints, Apple is reportedly worried that customer demand for a new flagship phone will be weak as the coronavirus has affected consumer confidence and spending.
That the iPhone maker was ‘considering’ that possibility would be no surprise, but one specific claim in the report was contradicted later in the week: that printed circuit board suppliers have been asked to delay production.
Taiwan’s PCB makers in the supply chain of 5G iPhones have denied reports claiming they have been asked to postpone volume production by two months in line with a likely launch delay for Apple’s new-generation devices amid the coronavirus pandemic, according to industry sources.
A weekend report suggested a third possibility: that there have been delays, but not definitive ones.
The production ramp-up for new phones that work with next-generation 5G networks has been postponed, this person said, though it is still possible the 5G phones could launch as scheduled in the fall.
Latest iPhone 12 production report
A Bloomberg piece today says that Foxconn, at least, remains on track.
Signs are that Apple’s Chinese-centric manufacturing — of which Hon Hai [Foxconn] is the linchpin — is slowly getting back on track. The next iPhones with 5G wireless capabilities remain on schedule to launch in the fall, partly because mass production isn’t slated to begin until the summer, people familiar with matter have said.
However, it does go on to say that the iPhone assembler is of course dependent on a massive upstream supply-chain of components, and it’s not known whether they will all be able to cope with mass-production volumes.
Yet the sort of assembly that Foxconn specializes in is but one part of Apple’s supply chain: the U.S. company and its partners spend months or even years sourcing components around the world and any disruptions to that complex network could delay future devices.
All of which is a way of saying we’re still in wait-and-see mode for now.
Foxconn profits down
The piece says that Foxconn’s profits fell 6% last year, likely on reduced demand caused by the US tariffs imposed by the Trump administration. It’s not yet known what impact the coronavirus disruption has had.
Hon Hai, which gets half its revenue from making iPhones and other devices for Apple in China, had grappled with rising U.S. tariffs on its goods even before Covid-19 smothered demand for electronics. Known also as Foxconn, the company has said it’s resolved labor shortages and is now back at normal seasonal capacity, but it remains to be seen how it fared during the March quarter, when the outbreak was declared a pandemic and government lockdowns dealt unprecedented shocks to the global supply chain.

>>> US Early premarket gappers

Early premarket gappers

Gapping up:

  • ABT +10%, SCS +6%, GM +6%, WMC +4.4%, ASML +3.4%, LMNX +2.7%, MTW +1.6%, MDT +1.5%, WORK +1.1%

Gapping down:

  • MITT -15%, USO -5%, PENN -4.6%, RWT -3.3%, ABB -1.8%, XLE -1.6%, EW -1.5%, XOM =1.3%, HAL -1.2%, BRKR -1%, SYY -0.7%

WSJ : Hidden Chinese Lending Puts Emerging-Market Economies at Risk

Hidden Chinese Lending Puts Emerging-Market Economies at Risk
About $200 billion of emerging-markets debt owed to China has gone unreported in official statistics in recent years

A hidden pile of debt threatens dozens of emerging-market countries as the global economy stalls and commodity prices tumble.

An estimated $200 billion of emerging-market debt owed to China has gone unreported in official statistics in recent years. The money is upending assumptions made by yield-hungry investors who have poured roughly $2 trillion into risky emerging markets over the last decade.

Even before the market crash, some borrowers were buckling under their debts to China. Pakistan turned to the International Monetary Fund in 2018 for a bailout. Sri Lanka was forced to cede China control of a strategically located port to shore up state finances.

U.S. and European economists are drawing parallels to the 1980s debt crisis that shattered growth in Latin America. A global recession would magnify the problem, economists and investors say.

Since the start of the year, dollar-denominated government bond prices have fallen by around 50% or more for some resource-rich countries like Angola and Ecuador that also owe heavy debts to China. An index tracking emerging-market sovereign bond performance has fallen around 16% while more than $80 billion has flowed out of emerging-markets stocks and bonds since the market turmoil began, according to the Institute of International Finance.

China’s rise as a trading and manufacturing power has been extensively studied over the last four decades, but its impact as a financial power is less understood. Exactly how much China has lent is kept under wraps by state-run banks such as China Development Bank and the countries receiving the loans. China’s opaque lending can lead investors and organizations to underestimate the risk they are taking when they make loans to these countries or buy their bonds, leading them to lend at rates that might be too low given the potential losses. These include global investors and multilateral lenders such as the World Bank.

Investors “have to be very, very leery of what’s going on,” said Carmen Reinhart, a Harvard University economist and former IMF official who has studied China’s lending practices.

Ms. Reinhart, one of the most influential U.S. economists on financial crises, was part of a team that over the last two years pieced together a data set of Chinese loans. A resulting study by Ms. Reinhart and economists Sebastian Horn and Christoph Trebesch concluded more than $200 billion of Chinese overseas loans–around half of all its cross-border lending–was hidden from public view. Around a dozen of the poorest countries owed debts to China equal to 20% or more of their annual GDP, the research estimated.

“The problem gets most acute in crisis situations,” said Mr. Trebesch.

Much of the growth can be traced to China’s sprawling “Belt and Road” initiative, which seeks to open up new trade routes, expand overseas opportunities for Chinese firms and deepen the country’s strategic influence through the financing and building of infrastructure.

Large commodity exporters that seek to sell to China are among the roughly 70 countries taking part in China’s program, many of which took on Chinese debt during the boom in commodities prices, but whose finances are particularly vulnerable to plunging commodity markets today.

“The debt burden from these projects is very quickly going to become unsustainable for many, many, many countries,” said Danny Russel, the State Department’s top diplomat for East Asia affairs under President Obama. “This is scary stuff.”

Nigeria, Africa’s largest economy and which depends heavily on oil exports, was one such recipient. Official statistics have presented China as a modest financier for Nigeria in recent years. By the end of 2017, Nigerian government statistics show external debt owed to China was under $2 billion.

In reality, the total debts Nigeria owed to China were more than double that amount, according to the research. Chinese loans have financed infrastructure such as a light-rail project for the capital city of Abuja. Last year, China also committed $629 million in financing for the country’s first deep-sea port. Nigeria’s government is trying to borrow an additional $17 billion from the state-controlled Export-Import Bank of China.

China’s lending, most of which is done in dollars, starkly contrasts that of multinational institutions such as the World Bank. While these groups lend money at below-market rates, China tends to lend at commercial rates, at times securing loans with a country’s oil or other natural resources.

Parallels to the 1980s debt crisis in Latin America—which spurred a “lost decade” of growth for Mexico and others—concern economists today. Just like the earlier case, a prolonged commodities boom fueled lending to resource-rich developing nations. Some economists say China’s opaqueness in its lending is reminiscent of the syndicated U.S. bank loans that crippled Latin America decades ago.

“The thing about the Chinese lending is it’s not transparent,” said Kevin Daly, investment manager for emerging-market debt at Aberdeen Standard Investments Inc. “Countries that do borrow from the Chinese, when you meet with their officials they do offer you a figure, but they don’t offer you details of the breakdown or the repayment schedule.”

Southeast Asia has proven a particular focus for Belt and Road projects. Malaysian debts owed to China are estimated to have surged from less than a billion dollars when the initiative launched to more than $12 billion at the end of 2017. In Indonesia, a $4.5 billion loan agreement with China Development Bank is helping the country to push ahead with its first high-speed rail project.

An economic crisis in Pakistan exemplified the risks. As a showcase of the Belt and Road program, China planned a $62 billion building spree across Pakistan, with China-backed ports, railways and other infrastructure to boost growth.

But Pakistani officials now say they hadn’t properly assessed Pakistan’s fiscal outlook when accepting Chinese loans and projects, which required the use of Chinese contractors in exchange for financing. Chinese-financed power plants, for instance, placed onerous financial obligations on the government, and contributed to a debt crunch that forced Pakistan to seek a bailout from the IMF. Islamabad denies that its debt problem is related to China.

China’s government has also denied engaging in what critics call “debt-trap diplomacy.” State-run lenders China Development Bank and the Export-Import Bank of China didn’t respond for comment.

China’s actions have garnered deeper scrutiny among U.S. officials, with the Trump administration nominating a critic of China’s foreign lending practices to lead the World Bank. David Malpass has used the position as the institution’s president to continue pushing China for more transparency, recently criticizing what he described as nondisclosure agreements written into Chinese foreign lending contracts.

“So, as the IMF or the World Bank goes into a developing country and says, ‘What are your debts?’, the country can’t tell you because they have a nondisclosure clause that’s really tightly written,” Mr. Malpass said in February.

U.S. criticism comes against the backdrop of an intensifying rivalry between the world’s two biggest economies, which the coronavirus crisis has only inflamed. A specific concern, current and former U.S. officials say, is that China uses indebtedness of weaker neighbors to gain leverage over them and pursue strategic aims.

A global recession may lead indebted countries to seek new terms with Chinese lenders, investors say, although it is too early to know how China will respond. Domestic economic constraints in China stemming from the coronavirus may make China less willing to roll over debts as they mature, which could exacerbate emerging-market liquidity challenges.

“China itself is also still recovering from a very huge shock,” said Esther Law, senior investment manager for emerging-markets debt at asset manager Amundi SA. The country “has lots of demands on its resources now.”

WSJ : This Trade Has Returned 633% in 2020—but Buyer Beware

This Trade Has Returned 633% in 2020—but Buyer Beware
Stock-market volatility has made betting on the speed and severity of market moves a popular—and risky—venture

One of this year’s hottest trades is betting on stock volatility. It is also one of the riskiest.

Traders big and small have sought to profit from the market’s wild swings. They are doing so through derivatives and exchange-traded products that tend to profit when markets are shaky. Some of the investments promise heightened exposure to volatility and often gain in value when stocks fall and turbulence rises.

It is the latest iteration of a long-running obsession with trading volatility since the last financial crisis, when betting on the speed and severity of market moves started to take off among retail and institutional investors alike.

This month’s moves have been unrivaled in the stock market’s history, igniting even more interest in the trade. The S&P 500 has swung an average of 5.2% every day, the highest on record and surpassing moves during the financial crisis, according to Dow Jones Market Data.

The head-spinning stretch for markets includes the index’s fastest-ever drop from a record into a bear market—defined as a 20% fall from the peak. U.S. stocks logged their worst week since the financial crisis earlier this month, then proceeded last week to stage the biggest three-day rebound since the 1930s.

Many are expecting the gyrations to continue as investors better understand the depth of the downturn stemming from the coronavirus pandemic. In the coming week, investors will get fresh reads on manufacturing and consumer confidence. New data released Friday showed a measure of consumer sentiment dropped sharply in March.

The recent swings—and perhaps the fear of the unknown ahead—make volatility wagers more enticing.

Assets under management for one such product, the VelocityShares Daily 2x VIX Short-Term Exchange-Traded Note, which goes by the ticker TVIX, hit a record $6.1 billion on March 19, FactSet data going back to 2014 show. Similarly, assets in the iPath Series B S&P 500 VIX Short-Term Futures ETN, or VXX, hit at least a two-year high of $2.6 billion that day. This month, VXX has been among the most popular exchange-traded products in the entire U.S. stock market.

It is easy to see their allure. While stock markets around the world have plunged this year, volatility has soared to levels never seen. Through Friday, the products were up 633% and 235%, respectively, year to date.

The S&P 500, meanwhile, has fallen 21% over that period. Its sharp swings continued last week even as the index leapt 10% higher after a month of punishing declines.

Through this tumult, even traditionally safer investments like gold and government bonds have fallen at times alongside stocks.

As other assets have fallen, rising volatility has drawn investors who might not otherwise trade the products, says Greg Taylor, chief investment officer at Purpose Investments.

“When things start to calm down, the vol can move fast and come out of the market quicker than anything else,” Mr. Taylor said. “People trading the vol ETNs and ETFs right now, I think, have to be really careful because those gains can drop quite quickly,” he said.

The products are notoriously risky to bet on. In the past, critics have said the products can sow more havoc and create distortions in markets. Holding them can chip away at a portfolio’s returns and timing their moves to profit from big jumps in volatility can be tricky even for seasoned traders.

Among those drawn to the trade is Shweta Agrawal, a retail trader based in Dayton, Ohio. She initially was attracted to TVIX because it appeared to buck the trend of the rest of the market.

“It looked like it was going against the market. Everything was going down, and TVIX was going up,” Ms. Agrawal said.

But in an unusual move, TVIX recently has fallen even as U.S. stocks plunged. For example, the product fell 6% March 20 as the S&P 500 dropped 4.3%. Something similar happened Monday. As TVIX kept falling in value, Ms. Agrawal kept buying, sure that it would rebound.

Ms. Agrawal said she lost about $50,000 trading the volatility product, a sizable portion of her portfolio. “I should have cut my losses,” she said.

Credit Suisse Group AG states in disclosures for the TVIX product that its volatility products are meant for sophisticated investors and should be used for short-term trading. Buying and holding the product likely will lead to significant losses, and the long-term value of the product is “zero,” the firm says.

Joe Amaturo, a Warwick, N.Y.-based project manager, said he initially bought shares of TVIX earlier in the year as he grew wary of the epic run in U.S. stocks, which were trading at records. It had been a drag on his portfolio, until recently.

“I added more because we are going into a big downturn in our economic situation,” Mr. Amaturo said. “Panic is hitting the market.”