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Tag: China

  • Top 10 Trends To Watch For 2020

    The end of the calendar year, and the decade, means readers should brace themselves for a bombardment of articles with all manner of forecasts and predictions for 2020. As always, many will be spectacularly wrong given human beings are particularly awful at forecasting. However, in the world of financial trading the trend is often your profitable friend. More importantly, trends can be evidenced with hard data. On that basis we thought it might be helpful to identify a mix of financial and geopolitical trends which are already established but will continue to impact business owners and investors for the forseeable future. Here’s our Top 10 with the usual health warnings:

    • Debt: Global debt has just topped the $250 trillion mark according to the International Institute of Finance (IIF). It’s rather scary to think that in the ten years since the credit crisis of 2008-2009 the world has piled on another $70 trillion of debt. This debt mountain is incredibly sensitive to rising interest rates. Hence, central banks led by the Fed have had to abandon attempts in 2018 to return interest rates to more normal levels. Central banks are now stuck in a Japan-style debt trap with additional credit creation achieving less and less stimulatory impact on economies. Now, frustrated and worried central banks are pressuring politicians to introduce fiscal policies to break out of this stagnation spiral. Unfortunately, politics at a global level is increasingly polarised.
    • Democracy: Levels of income inequality not seen since the 1930s presents the potential danger of history repeating itself. Democracy is under pressure. The Freedom House think tank published a report in 2018 highlighting that year as the 13th in succession where democratic freedoms were in decline. A total of 68 countries witnessed a tightening of civil liberties and political rights whereas only 50 countries registered progress in these areas. As 2019 comes to a close the strong-arm tactics of Trump, Putin, Xi, Orban, Erdogan and Prince MBS do not provide reassurance that authoritarian trends will reverse any time soon.
    • ESG: There is grounds for optimism that businesses and investors see “doing good” as a prerequisite for wealth creation. It almost sounds like common sense but the ESG investment framework covering Environment, Social and Governance factors is gaining traction rapidly with $30 trillion worth of investments now employing ESG metrics in their investment processes. That $30 trillion number will grow and standardised metrics to measure and audit ESG will be the next challenge for business and investor alike.
    • Trade: President Trump is now saying phase 1 of the China-US trade negotiations might not conclude until after the 2020 US elections. Who knows what will come out of Trump’s mouth next but expect 2020 to again be dominated by trade tensions in the EU with Brexit, and in Asia-Pacific with China. The rise of populist politics and trade protectionism are the two sides of a no-win economic confidence trick. Closer to home, Boris Johnson’s bombastic certainty of concluding trade deals with Europe by the end of 2020 will be particularly painful to watch unravelling.
    • China: The most important macro story apart from debt in the world today is China. It’s arguably the engine of growth which services the planet’s debt. By the end of this year Chinese consumers will have purchased goods worth more than $5 trillion, exceeding that of the original consumption super power, the US. So, financial markets will now have to pay much closer attention to the role of Chinese consumer confidence in the global economy. Think of how many decades financial research and trading teams have agonised every first Friday of the month for the US Non-Farm Payrolls. Get ready for Sunday night China economic reports but before that keep an eye on bond default newsflow. There have been four or five relatively significant blow ups in recent weeks, even involving State Owned Enterprises (SOEs). Do not underestimate the potential impact on consumer confidence if the all powerful state can’t save its own.
    • Tech Tension: Technology has been a dominant driver of markets since the credit crisis. Some companies now have user bases which would be in the top 3 populations of the world if they were sovereign states. Think Facebook and Alipay with 2.5 billion and 1 billion users respectively. As Microsoft and Apple’s combined market value now exceeds that of Germany’s entire stock market at $2.25 trillion it is tempting to think this is a high water mark for tech valuations. Two developing stories/trends suggest the tech sector could meet some growth challenges. First, Facebook’s power and abdication of responsibility on publishing false information to huge numbers of people is moving towards a 1911 moment. That date is neither a typo nor hyperbolic. For the historians, that’s the year when the Standard Oil refinery monopoly was broken up. Second, the rise of ESG is ultimately not compatible with corporate deference and fear of China’s wrath. The recent China anger incidents involving the NBA, Apple and Google suggest corporates may have to decouple from Chinese internet and broadcasting platforms. Yes, the internet could splinter and anyone following the Huawei case with fears over 5G security might be forgiven for thinking a “net split” is not just a possibility but inevitable.
    • Content is King: Even with a potential internet split, original content continues to be the critical asset for every media platform on the planet. We mentioned monopolies earlier but has anyone noticed that Disney has quietly assembled a portfolio of content assets with enormous power? Even before Star Wars opens in cinemas, Disney has accounted for $1 in every $3 spent in cinemas in 2019! The battle for content has exploded to unsustainable levels with almost 500 originally scripted TV shows produced this year. In 2012 that number was less than 300. And the costs are rocketing. One statistic we read recently was that for each $1 of a Netflix subscription the user was receiving $1 billion of content. It’s not just entertainment content. Think about the $5 billion valuation of Manchester City implied by the recent private equity investment made by Silver Lake Partners from Silicon Valley. Live sport is hot but $5 billion for a franchise which can’t fill its home ground…?
    • Energy: Climate change is for some top hedge funds now a critical factor in every investment selection. The climate crisis headlines multiply each week and this means continued pain for fossil fuel investors. Apple’s valuation is now bigger than the entire US Energy sector. Furthermore, for fossil fuel dependent economies like Saudi Arabia and Russia it is striking that their levels of sovereign interference have increased in recent years in the likes of Yemen, Syria and Ukraine. There is a suspicion that this projection of international power is an attempt to disguise significant structural weakness.
    • AI: We have been inclined to highlight the risks/areas to avoid but Accenture tells us there is a $14 trillion opportunity in AI across 16 industries in the years out to 2035. Health, finance, logistics and agriculture all look particularly suited to AI innovation and it is striking to see an out-of-favour sector like finance now attracting the largest chunk of venture capital money via European fintech.
    • Inflating Value: And that leaves us finally with another potential positive albeit it is difficult to argue this trend is established just yet. However, we can include this in our list with a speculative health warning! For years, value investing has been clobbered in performance terms by growth and momentum investing strategies. Yes, it might be difficult for oil to make a come back but other commodities could bounce back sharply if inflation picks up. Whisper it very gently but there is data/evidence to support wage inflation picking up in Europe. Wages are growing at the fastest pace in a decade and Europe remains the largest trading bloc in the world. A stronger Europe would be a very positive development. No doubt, investors stuck in value strategies will be watching hopefully for an end to their performance misery. The rest of the world should hope for the same too.

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  • Could The Internet Fracture?

    The debate about what is the true “fuel” of modern business is now over. The world’s largest oil company, Aramco, failed to drum up any international interest in its planned IPO last week. Not so for the world’s largest online retailer. And, we don’t mean Amazon. Despite plenty of shocking headlines about China in recent days, it would appear the world’s investors will park their social consciences if a tech-fueled business rolls into IPO town.

    Alibaba is the Chinese e-commerce giant that outsells Amazon by a factor of three times in terms of merchandise value and is listing its shares in Hong Kong this week. Yes, Hong Kong. Local elections may have delivered a bloody nose to Beijing-aligned candidates this week and blown up the party line that “the silent majority” was against the long-running protests against mainland political interference. However, Alibaba and its lucky stock code “9988” has provided some positive news for the Politburo. Investors have snapped up almost $13 billion worth of shares sending the stock price up more than 6% and delivering a vote of commercial confidence in Hong Kong. Alibaba’s success will be cheered in Beijing. Probably less so in the Chinese region of Xinjiang.

    Xinjiang is home to 11 million Uighurs of the Islamic faith. The persecution of this minority by Chinese authorities is not a new story and has been consistently denied by Beijing spokespersons. However, in recent days we have witnessed an all too rare media occurrence. Multiple international news broadcasters and publishers have given over top billing and front-page headlines to a remarkable expose which has generated its own “handle”, The China Cables.

    The cables are actually leaked documents given to the International Consortium of Investigative Journalists (ICIJ) and shared with seventeen media organisations including the BBC, the Guardian and Irish Times. The documents are a damning account of deliberative Chinese attempts to intimidate and oppress the Uighurs. The numbers are staggering as a complex of mass detention camps house up to 1 million prisoners without charge or trial. The ugly truth revealed is, per the Irish Times, “the largest incarceration of a minority since the Holocaust”.

    The leaked documents further detail the monitoring of mobile phone apps usage by Uighurs and behavioural flags prompting investigation and likely “re-education” in internment camps. In fact, China is well on its way to compiling a massive database to assist surveillance of its entire population and ultimately deliver “predictive policing” based on a social scoring system. Seventy-five years on, Auschwitz meets Alibaba. We are faced with the uncomfortable prospect of technology, the internet, which has brought the world closer together now being used as a weapon, forcing communities and nations to put up barriers. Indeed, China itself already employs a “Great Firewall” to control information received by its citizens. It would seem our fears are shared at the very highest levels of the planet’s most important sovereign community, the UN.

    In a recent interview with Wired magazine, Antonio Guterres as UN Secretary General expressed his view that the world’s next major conflict will start in cyberspace. Clearly, a cyber threat requires self-protective actions and it was striking that Guterres sounded the alarm bells about the current confrontation on trade and technology between China and the US. More specifically, he spoke about the risk of “decoupling” between the world’s two largest economies, “in which all of a sudden each of these two areas will have its own market, its own rules, its own internet, its own strategy in artificial intelligence.” The current travails of Chinese 5G champion, Huawei, might be only the beginning of protectionist policies introduced by countries watching China’s weaponisation of the internet.

    It is striking that one of the few areas in US politics which generate fully-fledged bi-partisan policy support is challenging China on its aggression in the technology sector. This is often described as “phase 2’ of US-China trade negotiations. Seasoned US-China observers increasingly believe there will never be a phase 2 of negotiations. At the moment the Orange Toddler in the White House is trying to undo the self-inflicted trade tariff damage covered by phase 1 negotiations. However, one does wonder whether events in Xinjiang will reverse the direction of talks and lead to a discussion at the UN level of additional global trade sanctions against the Beijing regime? One sadly suspects sovereign commercial interests will supersede human rights, for now.

    Events in Hong Kong will be watched closely as Beijing patience wears thin with the protestors encouraged by voter defiance this week. A harsh crackdown by Chinese authorities could force further strategic appraisal by business leaders of commercial exposure to a country whose social and technology policies diverge from the ethos of their firms. It is slightly unnerving that Holocaust references this week haven’t already prompted significant discussions. As business owners and investors, be under no illusions that any “decoupling” from China will have a far more significant online impact than the conscious uncoupling of Gwyneth Paltrow and Chris Martin. The internet risks fracturing into geopolitical spheres of influence with real cyber defensive and offensive weaponry.

    Consider recent instances of protectionist cyber actions in India/Kashmir, Iran and Turkey as early tests of the internet world order as we know it. History tells us that relatively local events like Sudetenland, Anschluss, Saar and Kristallnacht combined with political weakness can add up to a sudden global destabilisation. The global internet faces new technology challenges and an increasing number of bad actors – democratic nations are falling in number. Even the UN is worried the internet could suffer a decoupling or fracture. We are worried too, albeit we suspect Boris’s technology “lessons” in Shoreditch won’t prepare him for the fallout…

     

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  • Culture and Commercials Collide over China

    Culture and Commercials Collide over China

    The West’s Faustian pact with autocratic China is entering a very challenging phase and the timing is not without historical irony. Exactly fifty years ago Chairman Mao officially ended the disastrous Cultural Revolution initiated in 1966. That negative assessment is not just an outsider’s view; the Communist Party of China in 1981 stated that the Cultural Revolution was “responsible for the most severe setback and the heaviest losses suffered by the Party, the country, and the people since the founding of the People’s Republic”. The human cost was less explicit but is estimated at up to 2 million deaths. Fast forward to today and we are beginning to see headlines about “culture wars” involving China but this time the costs are more likely to be massive commercial damage. And not just for China.

    By now readers are familiar with the ongoing trade war between the US and China which is entering its latest round of negotiations this week. By all accounts it’s not going very well, a not unfamiliar experience for the cult followers of the Orange Toddler and “The Art of The Deal”. However, Trump’s take on the US relationship with China is one of the few policy areas where there is unanimous support across the domestic political spectrum for his view that China’s increasing commercial power and influence is negatively impacting US interests. Of course, Trump only sees the impact in dollar and balance of trade terms but US corporations are suddenly having to deal with a much more thorny issue; compromising their corporate values in order to protect commercial interests in Chinese markets. That was never in the Western capitalist play book.

    The consensus view among corporate capitalists was that the opening up of Chinese markets would deliver two big wins. Firstly, vast profits would be made from a billion plus population re-entering the global consumer market for the first time since 1949. Second, the assumption that, over time, Western values would be adopted by China and dilute the less palatable aspects of an authoritarian police state. Events of recent weeks would suggest the second assumption was very wrong which now threatens the correct commercial predictions. Just ask the National Basketball Association (NBA).

    Basketball, an American sporting staple, is now massive in China with an estimated 800 million fans or more than twice the entire US population. The commercial impact of that following is enormous in the context of TV rights and sports merchandise but now there’s a culture cost. The NBA has a reasonably well earned reputation for more progressive values compared to other US sports franchises like NFL(anthem kneeling) and MLB(political silence) but this week that reputation suffered badly.

    A tweet by Houston Rockets’ manager Daryl Morey in support of Hong Kong protestors triggered a firestorm from Chinese partners threatening lucrative TV and merchandise deals. The NBA responded with a craven apology for “hurt” caused to Chinese fans which rightly earned criticism in the US. Then there was a further communication making clear that there would not be an apology for the actual communication by Morey citing the NBA’s values of “equality, respect and freedom of expression”. The situation is still in flux and it’s possible the strength of the NBA franchise and lack of domestic alternatives will allow emotions to take a back seat eventually.

    However, the genie is out of the bottle as indicated by the following corporate examples:

    1. Apple has had to remove the Quartz news app in China because of its negative Hong Kong protests coverage. Hong Kong is not the only cultural touch paper. Apple has also removed the Taiwan flag emoji from its iOS operating systems in China.
    2. Marriott, the hotel chain, is also in trouble for listing Tibet as a separate country in a guest questionnaire.
    3. Luxury players, Versace and Swarovski, have both had to apologise to China for giving Hong Kong “country” status. Clearly, they didn’t get the “one country, two systems” memo. Nor have nearly every news channel on the planet currently observing events in Hong Kong.

    Information is power. Control of information is critical for authoritarian regimes and probably price insensitive as a survival tool. Therefore, it is possible the greatest commercial impact of the culture clash with China will be in the largest US commercial sector of them all, information technology. China is determined to maintain its “Great Firewall of China” which forced Google to give up its operations in the country as far back as 2010. Not for the first time, Google may have moved strategically earlier than most. The information strangle exported by China right now on corporates is merely the beginning of a major clash of values.

    At a more technological level the potential exile of China IT champion, Huawei, from the global IT eco-system could be the precursor to a “Digital Iron Curtain” being pulled across the Asian continent. Chinese companies like Huawei may have to develop their own internet protocols/platforms in a 5G world. This can only be commercially damaging for all companies and countries and might not stop at technology. Companies in the consumer space which have made huge profits in China will be torn between brand values and China profits. Both have a monetary value so a compromise will entail significant franchise valuation impact.

    One fears that developments in Hong Kong are poised to quantify that damage quite soon as corporates discover they traded their values for profits when Deng Xiaoping opened the door in 1978. Reversing that trade will be painful for companies, but probably triggered by far worse human suffering in Hong Kong.

  • Belt Up for the Year of the Rat

    Belt Up for the Year of the Rat

    In terms of purchasing power China is now the number one economy in the world. However, when we read financial headlines about monetary policy, Brexit and trade wars there is a tendency to view the challenges facing the global economy through Western-oriented glasses. More bluntly, one could be under the impression that it is in the gift of Western economies to find solutions to said challenges and all will be right with the world. Whisper it quietly to the Donald but 2020, the Chinese Year of the Rat, might not just be about whistleblowers…

    Trade wars may grab the headlines but the reality in a US context is less weighty. Goldman Sachs in 2017 published a report which showed the top 500 companies in the US (S&P 500) earned 30% of their revenues overseas. However, China accounted for just 1% of its revenues. In fact, a mere 41 of those companies generate 10% or more of their revenues in China. There is a real possibility that the business world is placing too much significance on the dampening effects of the US-China trade war on economic activity. In this writer’s view market analysts need to be more curious as to why Germany is teetering on the brink of recession.

    There is a real possibility that China is facing a structural challenge which Japan has faced for the last 3 decades; the growth-killing combination of a 300% debt/GDP ratio and an ageing labour force which is projected to lose 200 million workers by 2050. These numbers are massive and frankly won’t be changed by Fed monetary policies or the impeached removal of a US President. The global trade truth is that Europe is the largest trading bloc in the world and therefore serves as the canary in the coalmine for China’s impact on all its trading partners. The struggles of the German manufacturing sector tell us there may be a bigger story emerging.

    The Belt & Road initiative (BRI), China’s strategy to become a rival super power to the US is a classic example of Sino-long term planning. What has been missed by many, and is possibly now being experienced by German factories, is the sheer scale of this project. Here are a few data points which tell a huge story.

    • The Plan: The BRI strategy involves investment in 65 countries.
    • The Population: BRI countries have combined population of 4.4 billion people or 62% of the world.
    • The Economy: Combined GDP of BRI countries is $23 trillion, larger than the $20 trillion US economy.
    • The Spend: Estimated infrastructure requirements and spend through 2030 is $26 trillion.

    Let’s just say all roads lead to China. Or did. There is no doubt the BRI project has been a key driver of global economic activity in recent years but has been very dependent on Chinese credit. Unfortunately, China which has pledged $1 trillion to the BRI project is struggling under a crippling debt pile. There is a strong suspicion that a downturn in Germany’s manufacturing sector is an early warning signal that China is reining in its spend and this will not change irrespective of trade war resolution or central bank monetary interference.

    One wonders if the waning influence of Oriental fiscal stimulus is the reason why the ECB is almost begging the Germans and other governments to launch fiscal programmes? The real fear of central bankers is that renewed QE has no economic impact and kills market confidence. If China really does dial down its BRI activity the ECB fears will undoubtedly prove correct. Watch China GDP and credit growth very carefully, not the trade negotiations.

    Misplaced optimism on the resolution of US-China trade issues in the Year of the Rat might sink a few ships as well as a Presidency.

     

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