WSJ China’s Stumble Is More Than Seasonal


China’s Stumble Is More Than Seasonal

Play it again, Sam, could be the unofficial motto of the Chinese economy this time of year.

For the fourth year in a row, China has stumbled out of the gate. The latest sign was HSBC’s preliminary purchasing managers index for March, which dipped below 50, indicating a contraction in activity.

A separate proxy measure of growth by Capital Economics—mixing electricity production, transport usage, and the like—is at its lowest since the 2003 SARS crisis. The proxy indicates growth on a year-over-year basis in the first quarter will dip below the government’s full-year target of 7%.

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China naturally starts the year slowly because of the Lunar New Year holiday, during which factories shut down and workers go home. But that happens every year, so year-over-year growth indicators should take that into account.

ENLARGE
The ever-slower starts could be because companies have less cushion and confidence than they used to, suggests Andrew Batson of GaveKal Dragonomics. Corporate decision makers become scared that the slow start to the year wasn’t just a bump in the road, but the start of a prolonged downturn.

A property market that has failed to respond to the removal of lending curbs could be intensifying fears that this year is different. Most entrepreneurs in China are property investors in some form, through their companies’ use of real estate as collateral and investment, or because they own property in their personal accounts. A 5% drop in prices nationwide is understandably undermining confidence.

Stock market investors seem to think the slow start is fodder for Beijing to pump more stimulus into the economy. The Shanghai Composite, already up strongly thanks to interest-rate and reserve requirement ratio cuts, has taken another leg up and is now 14% higher than where it started the year.

And it does look increasingly likely that Beijing will have to do more to support growth. A campaign of bank reserve-requirement cuts, more interest rate cuts, further loosening of property curbs and increased fiscal spending from the central government are in the cards.

The official target for government deficit spending is 2.3% of GDP, though Finance Minister Lou Jiwei said it will actually be 2.7%. Because outstanding government debt is low, there’s room for Beijing to borrow. It’s a sign of the times that China’s deficit spending could run higher than America’s, which the Congressional Budget Office pegs at 2.6% this year.

The past few years, China has been able to prevent slow starts from getting too far out of control. As time goes by, China will have to dig deeper to keep up the streak.

Write to Alex Frangos at alex.frangos@wsj.com


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>>> US After Hours : VCEL +16.7%, DGLY +15.0%, CHRS +7.4%, CCM

After Hours Summary: VCEL +16.7%, DGLY +15.0%, CHRS +7.4%, CCM -16.1%, JRJC -14.7%, FLXN -1.3% following earnings/guidance

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings: VCEL +16.7%, DGLY +15.0%, CHRS +7.4%, EPRS +5.8%

Companies trading higher in after hours in reaction to news: VOXX +9.2% (co's iris authentical product, EyeLock, was mentioned positively on CNBC), CHK +3.4% (reduced 2015 CapEx budget to $3.5-4.0 bln from $4.0-4.5 bln; Carl Icahn increased stake to 10.98% from 9.98%), EGL +2.6% (co was awarded an Indefinite Delivery Indefinite Quantity multiple-award contract with a $1 bln ceiling to provide technical advisory services to the U.S. Agency for International Development), ABMD +1.7% (confirmed Impella 2.5 received FDA approval for elective and urgent high risk percutaneous coronary intervention procedures), RICE +1.2% (co announced pricing of $400 mln of 7.25% senior notes due 2023 at 99.233%, for a yield to maturity of 7.375%),

After Hours Losers:

Companies trading lower in after hours in reaction to earnings: CCM -16.1%, JRJC -14.7%, FLXN -1.3%

Companies trading lower in after hours in reaction to news: WLL -11.7% (announced offering of 35 mln shares of common stock; also anounces private offerings of $1 bln of convertible senior notes due 2020 and $750 mln of senior notes due 2023), ZSPH -5.3% (announced proposed public offering of 3.3 mln shares of its common stock), GLP -4.7% (announced that the owners of AE Holdings Corp. are selling 1,956,234 common units in an underwritten secondary public offering), HTGC -3.5% (announced that it is offering 6.6 mln shares of common stock pursuant to an effective shelf registration statement in an underwritten public offering), SAAS -3.3% (announced intention to offer $100 mln of Convertible Senior Notes due 2022), GLOB -3.3% (announced that certain of its shareholders have commenced a secondary public offering of 2,906,266 common shares), LQ -2.4% (announced a secondary offering of 17.5 mln shares of common stock, by selling stockholders affiliated with The Blackstone Group), DPLO -2.3% (announced that it has commenced its follow-on public offering of 7.4 mln shares of its common stock; 3.0 mln shares will be sold by selling shareholders), KW -2.1% (announced plans to sell 7.5 mln shares of its common stock)

>>> US Close

Closing Market Summary: Cyclical Sectors Lead Modest Retreat

The stock market began the trading week on a sleepy note. The Dow Jones Industrial Average (-0.1%) and S&P 500 (-0.2%) surrendered their slim gains during the final hour while the Nasdaq Composite settled lower by 0.3% after lagging throughout the session.

Equity indices spent the entire Monday session near their flat lines while the Dollar Index (96.86, -1.05) extended its retreat that began late last week. The index fell 1.1% with the greenback giving up 1.4% to the euro (1.0966). The single currency rallied in the morning and saw little afternoon reaction to a joint press conference held by German Chancellor Angela Merkel and Greek Prime Minister Alexis Tsipras. The two leaders did not provide any specifics about their earlier meeting, suggesting the two sides remain at odds with regard to finding a sustainable solution for Greece.

Today's dollar pullback was a supportive factor for crude oil as the energy component climbed off its overnight low ($45.35/bbl) to end higher by 1.8% at $47.44/bbl. WTI crude spent the bulk of the day near its flat line, but spiked ahead of the pit close without any headlines to account for the move.

Interestingly, the energy sector (-0.2%) began among the leaders, but retreated steadily throughout the session. As for other cyclical groups, technology (+0.1%) and consumer discretionary (-0.1%) outperformed while financials (-0.4%) and industrials (-0.8%) struggled.

The industrial sector was pressured by transport stocks after Kansas City Southern (KSU 106.48, -9.21) lowered its guidance. The company cited slower year-to-date carload growth, devaluation of the Mexican peso against the dollar, and lower fuel surcharge revenue as reasons for the reduced outlook. Shares of KSU plunged 8.0% while the broader Dow Jones Transportation Average lost 2.0%.

On the flip side, the technology sector was underpinned by its top component—Apple (AAPL 127.21, +1.31)—and a spate of other large cap names while high-beta chipmakers lagged. NVIDIA (NVDA 22.71, -0.76) was a notable laggard, falling 3.2%, after Goldman Sachs downgraded the stock to ‘Sell.' For its part, the PHLX Semiconductor Index lost 1.0%.

Furthermore, the relative weakness among chipmakers contributed to the underperformance of the Nasdaq Composite. The tech-heavy index had to contend with broad-based losses in the biotech space after Vertex Pharmaceuticals (VRTX 125.79, -5.21) reported below-consensus results from one of its trials while Gilead Sciences (GILD 100.26, -2.03) was clipped after Bloomberg reported that some patients who had been taking Gilead's hepatitis C drugs in combination with certain heart drugs have developed complications. Vertex and Gilead lost 4.0% and 2.0%, respectively while iShares Nasdaq Biotechnology ETF (IBB 358.28, -8.24) settled lower by 2.3%.

Biotechnology also weighed on the health care sector, keeping the group in-line with the market. The remaining countercyclical sectors displayed relative strength with utilities (+0.1%), telecom services (+0.1%), and consumer staples (+0.3%) ending ahead of the broader market.

Treasuries settled on their highs with the 10-yr yield down three basis points at 1.91%.

Today's participation was below average with roughly 716 million shares changing hands at the NYSE floor.

Economic data was limited to existing home sales for February, which increased 1.2% from January to an annualized rate of 4.88 million units (consensus 4.90 million).

Supply problems continue exerting downward pressure on home sales. Inventories remained at a 4.6 months' supply at the current sales rate for the second consecutive month. During normal periods of market activity, inventories are generally maintained at 6.0 months' supply.

Tomorrow, February CPI (consensus 0.2%) and core CPI (consensus 0.1%) will be released at 8:30 ET while the FHFA Housing Price Index will cross at 9:00 ET. The day's data will be topped off with the 10:00 ET release of the New Home Sales report for February (consensus 465K).
  • Nasdaq Composite +5.8% YTD 
  • Russell 2000 +5.1% YTD 
  • S&P 500 +2.2% YTD 
  • Dow Jones Industrial Average +1.6% YTD

>>> Asian Update

Asian Mid-session Update: China PMI returns to contraction; ADB sees continued China slowdown

***Economic Data***
- (CN) CHINA MAR HSBC FLASH MANUFACTURING PMI: 49.2 V 50.5E (11-month low)
- (CN) CHINA FEB CONFERENCE BOARD LEADING ECONOMIC INDEX M/M: 1.5% V 0.5% PRIOR; 2-year high and 11th consecutive increase
- (JP) JAPAN MAR PRELIM MARKIT/JMMA MANUFACTURING PMI: 50.4 V 52.0E (10-month low)
- (AU) Australia Jan Conference Board Leading index m/m: 0.4% v 0.3% prior (3rd consecutive increase)
- (AU) Australia ANZ Roy Morgan Weekly Consumer Confidence Index: 111.4 v 110.8 prior

***Index Snapshot (as of 02:30 GMT)***
- Nikkei225 -0.2%, S&P/ASX +0.2%, Kospi -0.1%, Shanghai Composite -1.2%, Hang Seng -0.4%, Jun S&P500 flat at 2,095

***Commodities/Fixed Income***
- Apr gold -0.2% at $1,186/oz, May crude oil -1.0% at $46.99/brl, May copper -3.0% at $2.79/lb
- SLV: iShares Silver Trust ETF daily holdings fall to 10,118 tonnes from 10,163 tonnes prior; lowest since Feb 22nd
- (CN) PBoC to inject CNY20B in 7-day reverse repos (8th consecutive injection); Offers yield at 3.55% v 3.65% prior on Mar 18th (3rd straight week of 10bp decline)
- USD/CNY: PBoC sets yuan mid point at 6.1398 v 6.1448 prior setting (strongest yuan setting since Feb 26th)
- (AU) Australia MoF (AOFM) sells A$200M in 1.25% bonds due 2022; Avg yield: 0.0542%; Bid-to-cover: 4.36x

***Market Focal Points/FX***
- Shanghai Composite is headed for its first losing session in 10 days after a surprisingly disappointing HSBC flash PMI. Manufacturing was expected to expand for the 2nd consecutive month but instead plunged into contraction, falling to its lowest level in 11 months. HSBC economist cited a renewed fall in total new business and workforce reduction, along with falling import prices as a result of oil-driven disinflation. AUD/USD hit its lows below 0.7840 on the release, down about 60pips from early highs, while NZD/USD was down over 40pips below 0.7630. Separately, the stronger rise in Jan China Conference Board leading index was attributed to the Lunar New Year demand. Local press also speculated Shanghai would allow home buyers using Housing Provident Fund to borrow up to 50% more than under previous quota in a bid to prop up prices after a disappointing property sector report last week.

- Asia Development Bank 2015 Outlook raised developing Asia GDP to 6.3% from 6.2% and also forecast 2016 at 6.3%. ADB also affirmed China at 7.2% - down from 7.4% last year - with 2016 estimated to fall further to 7.0%. South Korea was cut by 0.3pts to 3.5%, but India projections were lifted all the way to 7.8% from 6.3%. ADB pointed to strengthening recovery in the major industrial economies and soft global commodity prices contributing to steady regional growth expectations, but also warned policymakers to be vigilant of potential risks.

- Comments from Fed Vice Chair Fischer in today's US session reinforced last week's message that any monetary policy adjustment would be gradual, if not distant. Unlike the past tightening campaign when the Fed raised rates at every meeting, Fischer said this time rates could move up and down. Fed-speak during the Asian hours has been considerably less dovish. Fed's Bullard spoke to FT, reiterating that rates need to start rising as soon as possible to prevent the risk of "asset price bubbles with devastating consequences". Fed's Williams, who previously tilted toward the more dovish side, noted the economy is looking much better and that the Fed should be forward looking on policy without waiting for inflation to hit 2%. Similar to Fed Chair Yellen last week, Williams added the recent rally in USD had a large impact on economic forecasts, but that rates should rise despite the green back strength.

***Equities***
US equities / ADRs:
- DGLY: Reports Q4 -$0.30 v -$0.74 y/y, R$5.42M v $3.5M y/y; +14.6% afterhours
- CHK: Updates Its 2015 Operating Plan in Response to Low Commodity Price Environment; Lowers capital budget forecast to $3.5-4.0B from $4.0-4.5B; +2.4% afterhours
- PBR: S&P revises outlook to Negative from Stable; Affirms CCR at BBB-; -1.4% afterhours
- LQ: Announces Secondary Offering of 17.5M Shares of Common Stock for Blackstone affiliates (13% of shares outstanding); -2.4% afterhours

Notable movers by sector:
- Consumer Discretionary: Kathmandu Holdings KMD.AU -11.8% (H1 results); Qantas Airways QAN.AU -2.3% (ACCC to deny Qantas, China Eastern coordination)
- Materials: New Hope Corporation NHC.AU +1.6% (H1 results); Fortescue Metals Group FMG.AU +1.8% (said to sell asset); Anhui Conch Cement 914.HK -1.3% (FY14 results)
- Industrials: Worley Parsons WOR.AU +2.2% (shareholder raises stake); Mazda Motor Corp 7261.JP +1.9% (comments on diesel vehicles); Qinhuangdao Port 3369.HK +7.8% (FY14 results)
- Technology: Sharp Corp 6753.JP +2.0% (extended investment talk with Hon Hai); GS Yuasa Corp 6674.JP -3.2% (cuts FY14/15 guidance); Leshi Internet Info & Tech 300104.CN +3.5% (enters strategic cooperation with BAIC on internet cars); Coolpad Group 2369.HK -3.4% (FY14 results)
- Utilities: Oki Electric Industry 6703.JP +2.7% (speculation over FY14/15 results)

>>> Fed Vice Chair Stanley Fischer: Fed likely to raise rates before year end an

Fed Vice Chair Stanley Fischer: Fed likely to raise rates before year end and could be driven by a multiple of factors - comments in New York 
- after first rate increase, rate moves could be up or down
- not expecting a repeat of prior gradual rate increase campaigns
- current unemployment rate is near its natural level
- supplementary tools could help the Fed increase short term rates when appropriate

FT : Private equity’s big clear-out boosts SVG

Private equity’s big clear-out boosts SVG

A buoyant market for buyout firms selling off pre-crisis investments boosted returns for the listed British private equity investor SVG Capital last year, as disposals of companies including Hugo Boss and Freescale raised cash and lifted valuations.
SVG’s portfolio of private equity funds generated a total return of 10 per cent and a 14 per cent increase in its net asset value per share for the 13 months to the end of January, according to its annual results on Monday.

The group handed a record £330m in cash to shareholders, who invest in SVG as a tradeable proxy for the performance of buyout funds, including Permira, its largest holding.
The results were tempered by the euro’s slide versus sterling — total return was 17 per cent in local currencies — but they also show how a year of surging valuations on stock markets has resurrected investments that private equity once preferred to forget.
The increase in SVG’s NAV to 588p a share was driven by the doubling last year of the share price of Freescale, the US semiconductor company which has since been acquired by NXP for $16.7bn.
Permira invested in Freescale in 2006 as part of a private equity consortium. Waylaid by the financial crisis, the company’s value languished below its purchase price until last year.
“We’ve been waiting for a long time for that one,” said Lynn Fordham, SVG chief executive. “Freescale going above cost was a big thing.”
Sales by Permira of shares in Hugo Boss also drove nearly half of the £330m returned to shareholders, and the completion of its exit from the 2006 investment this month will provide further cash this year.
Spun out from Schroders’ private equity business nearly two decades ago, SVG has sought to overhaul its investment strategy in the past three years, including reducing its reliance on Permira.
The group’s 10 largest fund investments fell from four-fifths to two-thirds of its portfolio over the year. A quarter of the portfolio is in 30 investments — including European and US funds Cinven and Clayton Dubilier & Rice — added since 2012 in a £467m commitment of capital.
The group said it also changed its year end from December 31 to January 31 because it needed more time to collect and calculate the end of year valuation of its various investments.
SVG has returned £540m to shareholders since 2012, more than its market capitalisation before it announced its new strategy.
The flipside is that rising valuations are making it harder for buyout firms to find good deals. “We’re very careful whom we choose as managers: we’re quite cautious” at the moment, Ms Fordham said.