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October 15 2021

Commentary by Eoin Treacy

China Breaks Silence on Evergrande, Says Risks Controllable

This article for Bloomberg may be of interest to subscribers. Here is a section:

Zou also said:

China’s government has insisted that property not be used as a short-term stimulus for the economy
Cities have seen an excessive surge in property prices, which mortgage restrictions helped to curtail
Property investment has slumped recently after some developers faced credit problems, but this is a normal market phenomenon
Some banks have misunderstood macroprudential policies regarding the property sector.

“This is the strongest signal yet that authorities won’t come to the rescue of creditors of Evergrande and other developers,” said Travis Lundy, a special situations analyst who publishes on Smartkarma. They are sticking to the stance that there won’t be any property-boosting measures, aside from small steps such as faster home-loan processing and efforts to alleviate mortgage limits at banks, he added. 

Financial regulators have told some major banks to accelerate approval of mortgages in the last quarter, Bloomberg reported earlier Friday. Lenders were also permitted to apply to sell securities backed by residential mortgages to free up loan quotas, easing a ban imposed early this year, according to people familiar with the matter.

Eoin Treacy's view -

It’s ironic that when China talks about market principles it means they are no longer willing to bailout failed ventures but are more than willing to curtail growth in successful ones; that do not gel with policy. The number of defaults has been trending higher since they were allowed a few years ago, and will surge this year.



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October 11 2021

Commentary by Eoin Treacy

China Bonds Slide Most Since August as Bets on Easing Unravel

This article from Bloomberg may be of interest to subscribers. Here is a section:

Bonds fell after the central bank withdrew a net 190 billion yuan ($29.5 billion) of short-term funds from the banking system Monday after draining the most since January on Friday. The likelihood of a rate cut in the near term is low and the timing of a reduction in the reserve requirement ratio is uncertain, state-backed China Securities Journal said.

China’s benchmark 10-year yields climbed five basis points to 2.95% on Monday, the highest close since July. 

The jump in 10-year yields sent them out of the 10-basis-point range where they had been since the start of August, suggesting traders are giving up bets on aggressive monetary easing. The selloff also followed losses in other global bond markets amid a surge in inflation expectations due to rising energy prices and central-bank progress toward normalization.

The selloff is far from over, analysts at Guotai Junan Securities Co. led by Qin Han in Shanghai wrote in a research note. “All the factors, apart from weak economic growth, are negative for the bond market. The adjustment in China’s bond yields in the fourth quarter may be more drastic than expected.”

Eoin Treacy's view -

The PBoC actively supplied funds to the banking system ahead of the mid-Autumn festival holiday. That helped to allay fears of outright contagion to the wider market and supported the view the administration is fully aware of the risks the property market slowdown entails. By taking some of that money back out, the PBoC is trying to signal they have no intention of bailing out the whole world, like they did following the credit crisis. They might not have a choice. 



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October 11 2021

Commentary by Eoin Treacy

Lumber prices have risen 50% since August, and 2 experts say the resurgence will continue through early 2022

This article from Markets Insider may be of interest to subscribers. Here is a section:

A reason for the price increase in lumber is a modest increase in renovation demand after price-sensitive buyers proceeded with home improvement projects now that wood prices have seen a substantial correction, Dustin Jalbert, senior economist at Fastmarkets, told Insider.

Though Jalbert does not expect the kind of runup in lumber prices seen earlier this year - a period when there was a backlog of homes waiting to be built and a shortage of key construction supplies - as pandemic-related supply constraints continued to ease.

"The market has finally transitioned to a more balanced state compared with being severely oversupplied in the summer months, which ultimately drove the massive correction in prices from record-high levels set in May," Jalbert told Insider.

And even if Americans wanted to build and renovate homes, the field consumption of lumber is being bogged down by shortages of other complementary materials such as windows, siding, cabinet appliances, and garage doors, he added.

The supply side, meanwhile, continues to face challenges, Jalbert said. Log costs in British Columbia, which accounts for about 16% of North American lumber capacity, remain elevated.

Eoin Treacy's view -

Commodities tend to remain in well-defined ranges for years before breaking out and rallying in a profound manner that creates an uncomfortable feeling for consumers and sets new price expectations for sellers. Lumber spiked higher between 1991 and 1993. It subsequently gave up most of the advance but never dropped back into the preceding range.



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October 07 2021

Commentary by Eoin Treacy

Alibaba, Didi, and Other Chinese Tech Stocks Surge as U.S.-China Relations Brighten

This article from Barron’s may be of interest to subscribers. Here is a section: 

The U.S. and China agreed Wednesday that President Joe Biden and President Xi Jinping would meet before the end of the year. It will be a virtual meeting and follows a call between the two leaders that was held in September -- that was their first in seven months.

The virtual summit was announced shortly after White House national security adviser Jake Sullivan met a senior Chinese foreign policy advisor, Yang Jiechi, in Zurich, according to The Wall Street Journal.

"While we expect minimal material improvement in the tone or substance of their relationship in the coming months, we still see investment opportunities on both sides, especially in the areas of capital markets, technology, cybersecurity, and climate change," said strategists led by Mark Haefele, the chief investment officer at UBS Global Wealth Management.

"In our view, investors should avoid taking sides. The best long-term approach is to seek exposure to the different economic cycles, growth opportunities, and sectoral trends offered by both countries," the team at UBS said.

Strategists at the Swiss bank noted speculation around possible topics for discussion included trade, Taiwan, and climate issues.

Eoin Treacy's view -

Churchill’s “Jaw-Jaw is better than “War-War” comes to mind. It also begs the question whether the Biden administration is willing to make concessions on Taiwan’s independence for better trading conditions? That was certainly the case during the initial negotiations with China 50 years ago and not a lot has changed in terms of China’s priorities.



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October 05 2021

Commentary by Eoin Treacy

Beijing Blinked First in China's Energy Crisis

This article by David Fickling for Bloomberg may be of interest to subscribers. Here is a section:

It looks like the government has blinked first. Miners, after months of being ordered to stick closely to capacity limits, are now being ordered to produce as much as they can, people familiar with the matter told Bloomberg News. That should help to take the wind out of surging thermal coal prices and prevent the current crisis from extending into the winter, when sufficient energy supply can be a life-or-death matter.

There is, to be sure, an attempt to make this retreat look like a withdrawal. The latest advice from Beijing’s economic planners last week focuses on protecting individuals but continuing the crackdown on industry, especially when it’s most energy-intensive and polluting. Allowing generators to raise prices to end-users, as is happening in Guangdong province, will also help create a more commercial power market. Electricity consumption controls have even been loosened in a way that would permit potentially unlimited volumes of cheaper renewable power into the market.

The risk, as with the rapidly fading fears over Evergrande, is that Beijing has simply deferred a pressing problem again. If China doesn’t reform a system that refuses to face up to its internal contradictions, the problems of an economy fed by credit and carbon will only fester and grow. 

 

Eoin Treacy's view -

Self sufficiency is Chinese government policy. Coal imports do not gel with that ambition so efforts to defray demand are likely to persist in a piecemeal manner subject to necessity. However, the reality is winters north of the Yangtze River are harsh and most communities rely on coal to heat homes, factories and run electricity.



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October 01 2021

Commentary by Eoin Treacy

Secular Themes Review October 2021

Eoin Treacy's view -

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on May 7th. These reviews can be found via the search bar using the term “Secular Themes Review”

Supply Inelasticity Meets Rising Demand was the phrase David coined to explain the last commodity-led bull market. After decades of underinvestment in commodity supply infrastructure, the market was not prepared for the massive swell of new demand from China; as it leaped from economic obscurity into one of the largest economies in the world. A decade of investment in new production was needed to supply China and that crested ahead of the credit crisis in 2008.

Today, we also have extreme example of supply inelasticity, and demand is breaking records for all manner of goods and services. The factors contributing to these trends are quite different from a decade though. Some will be resolved relatively quickly. Others will take years.



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September 29 2021

Commentary by Eoin Treacy

China Keeps Cash Engine Running in Ninth Day of Injections

This article from Bloomberg may be of interest to subscribers. Here is a section:

The central bank has added a total net 750 billion yuan via open market operations since Sept. 17. When onshore markets reopen on Oct. 8, 340 billion yuan of 14-day reverse repurchase agreements will fall due. Later in the month, 500 billion yuan of medium-term lending facility is set to expire. 

Overnight interbank funding costs slid 43 basis points to 1.48%, the lowest since May, after the cash infusion. The seven-day repurchase rate, which covers the week-long break, rose 36 basis points to 2.55%, a level last reached at end-June. 

The injection is also expected to allay fears of a contagion stemming from Evergrande’s debt problems. In a bid to contain the fallout from the property developer’s woes, China has stepped in to buy a stake in a struggling regional bank from Evergrande.

“The purpose of liquidity injection is mainly to give market confidence amid the Evergrande crisis,” said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. “Having said that, there is still a possibility of a RRR cut in October due to a slowdown in economic activities caused by supply constraints and slower export growth.”

Speculation of an easing comes after recent data indicated that the pace of expansion in the world’s second-largest economy is slowing. A power crisis is adding to the strain and economists from Goldman Sachs Group Inc. are among those who have slashed their growth projections for this year.

China’s 10-year sovereign bond yield fell one basis point to 2.86% on Wednesday. It sank to a 14-month low after the PBOC unleashed 1 trillion yuan of liquidity into the system via a reduction in the RRR in July. 

Eoin Treacy's view -

For China watchers, the big question over the last year was when would the credit cycle turn. It is looking increasingly likely that the China Evergrande default is the catalyst for additional infusions of liquidity that will likely last for at least the next year and potentially longer.



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September 29 2021

Commentary by Eoin Treacy

Dollar Tree to Add Products Above $1 in Dollar Tree Plus Stores

This article from Bloomberg may be of interest. Here it is in full: 

Dollar Tree said it plans to begin adding new price points above $1 across all Dollar Tree Plus stores.

To test additional price points above $1 in selected legacy Dollar Tree stores
On track in 2021 to have 500 Dollar Tree Plus stores by fiscal year-end
Another 1,500 stores are planned for fiscal 2022; at least 5,000 Dollar Tree Plus stores are expected by the end of fiscal 2024
Currently has 105 Combo Stores; expects to add 400 Combo Stores in fiscal 2022
Sees potential for up to 3,000 Combo Stores over the next several years

Eoin Treacy's view -

Rising shipping costs, power cuts in major manufacturing centres and rising commodity prices all point towards margin compression for the sellers of low-priced items. They have no choice than to pass that inflation along to customers. The temporary shutting down of port facilities outside Shanghai will also have had the knock-on effect of putting upward pressure on prices because so much manufacturing capacity of low-cost items comes from Zhejiang.



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September 29 2021

Commentary by Eoin Treacy

Solar ETF Drops Most in Four Months as China Rattles Sector

This note by Michael Bellusci for Bloomberg may be of interest to subscribers. Here it is in full:

Invesco Solar ETF (TAN) falls as much as 6.5% intraday, the most since May 4, amid growing investor jitters about China’s real estate crackdown potentially sparking a financial contagion. 

Among individual stocks, JinkoSolar down as much as 10.6% during the session, Beam Global -9%, Daqo New Energy -10%, First Solar-9.3%, Canadian Solar -7.8%

Eoin Treacy's view -

China is by far the largest manufacturer of solar panels. Silica is a major component for the sector and production is being hampered by electricity supply disruptions. That’s taking a toll on the solar sector. At the same time the upward pressure on government bond yields threatens the business model of many domestic installation businesses.



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September 24 2021

Commentary by Eoin Treacy

Email of the day on slower Chinese growth:

Think, you may find interesting this Financial Times story that looks into the longer-term consequences of Evergrande saga - https://on.ft.com/3io45gH (open link). It seems that the Chinese real estate market finally (at long, long last) is crumbling, not without help of the country leaders. If it is so and given the fact that the property market accounts for 29% of the Chinese GDP (and land sales to developers, for the third of local governments’ revenues), the economic growth seems to slow dramatically in the coming years. What could be implications, in your view? We all remember that China and its industrialization were the major drivers of the global commodities supercycle in the 21st century. Also, every time China has got into trouble, the Communist party used the same recipe “more investments in infrastructure and construction, more leverage. If now China and its property sector grow much more slowly, not to mention possible contraction of the latter, it will need much less metals and materials, and also possibly less gas (to power plants and send it to homes) and even oil (fewer working trucks and construction equipment). What do you think?

Eoin Treacy's view -

Thank you for this informative email which may be of interest to the Collective. Here is a section from the FT article:

An even more consequential trend for China’s political economy is the collapse in land sales by local governments, which fell 90 per cent year on year in the first 12 days of September, official figures show. Such land sales generate about one-third of local government revenues, which in turn are used to help pay the principal and interest on some $8.4tn in debt issued by several thousand local government financing vehicles. LGFVs act as an often unseen dynamo for the broader economy; they raise capital through bond issuance that is then used to fund vast infrastructure projects.

The property market has funded local governments for decades. Without a solid trend of land sales municipal governments face bankruptcy. There is just no way the central government can let that happen. The first order solution will be to avert contagion into the rest of the property market following Evergrande’s demise.



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September 23 2021

Commentary by Eoin Treacy

Evergrande marks the end of China's economic miracle

Thanks to a subscriber for this article from Ambrose Evans Pritchard for The Telegraph. Here is a section:

Harvard Professor Ken Rogoff and Yuanchen Yang (now at the IMF), say Chinese property and construction amount to 29pc of GDP when all ancillary sectors are included. Housing makes up four fifths of personal wealth and land sales make 40pc of local government revenues.

They argue that this extreme dependence on the property nexus has not been tested because super-charged growth rates hide all sins. But China is no longer growing fast. Xi Jinping’s neo-Maoist ideology of “common prosperity” marks a profound break with the Deng Xiaoping catch-up model.

“We find that a 20pc fall in real estate activity could lead to a 5-10pc fall in GDP, even without amplification from a banking crisis, or accounting for the importance of real estate as collateral,” they said.

The US Federal Reserve’s Ben Bernanke once famously said “we’ve never had a decline in house prices on a nationwide basis” and nothing had substantially changed. But it had changed. The national Case-Shiller index would soon fall by 36pc.

The Rogoff-Yang paper said nothing should be assumed in the case of China either. “Even the very cautious pragmatic Chinese regulators may not yet be fully anticipating the depth of the possible fall in China’s housing prices,” it said.

Deflating an economy that is so hyper-leveraged to property is going to take years and will be untidy. China will almost certainly avert a Minsky crisis but it may not avert a long grinding semi-slump that profoundly changes the world’s perception of the country.

Eoin Treacy's view -

This conclusion makes sense to me. We are probably at the peak of speculative interest in the Chinese property market. The Party understands that the property sector will represent a threat to its rule if there is a collapse but also if prices accelerate further from here. That suggests progressively more measures to reduce leverage in the system. At a minimum that implies smaller companies and less construction activity.



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September 22 2021

Commentary by Eoin Treacy

Global Traders Given Evergrande Reprieve as PBOC Adds Liquidity

This article from Bloomberg may be of interest to subscribers. Here is a section:

China’s central bank boosted its gross injection of short-term cash into the financial system after concern over a debt crisis at China Evergrande Group roiled global markets. 

The People’s Bank of China pumped 120 billion yuan ($18.6 billion) into the banking system through reverse repurchase agreements, resulting in a net injection of 90 billion yuan. That matches the amount seen on Friday, and was just below that of Saturday. Sentiment was also boosted after Evergrande’s onshore property unit said it plans to repay interest due Thursday on its local bonds. 

“The PBOC’s net injection is probably aimed at soothing nerves as the market worries about Evergrande,” said Eugene Leow, a senior rates strategist at DBS Bank Ltd. in Singapore. “While the aim may be to instill discipline, there is also a need to prevent contagion into the real economy or to other sectors.”

The need to calm market jitters is pressing amid losses in China-related equities worldwide over recent days amid concern over Evergrande’s debt woes. The benchmark CSI 300 Index fell as much as 1.9% Wednesday after the Hang Seng China Enterprises Index -- a gauge of Chinese shares traded in Hong Kong -- slid the most in two months on Monday. Losses came even as Wall Street analysts sought to reassure investors that Evergrande won’t lead to a Lehman moment.

Eoin Treacy's view -

Any way we look at it, China will need to print more money. If the Evergrande issue is resolved through restructuring in a timely manner it will be less. If the issue is fudged and the hit to the economy is deep, it will be more. Following the announcement that a domestic bond coupon will be paid, there is only one question. What about international investors?



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September 21 2021

Commentary by Eoin Treacy

Is Evergrande a risk for global financial markets?

Thanks to a subscriber for this report from UBS which may be of interest. Here is a section: 

September 20 2021

Commentary by Eoin Treacy

Market Contagion Tests Xi's Resolve on Evergrande, Property Curbs

This article from Bloomberg may be of interest to subscribers. Here is a section:

The response so far has been largely limited to the People’s Bank of China, which injected a net 90 billion yuan into the banking system on Friday. It added another 100 billion yuan on Saturday.

Evergrande has around $300 billion worth of liabilities, more than any other property developer in the world. It’s a whale in China’s high-yield dollar bond market, accounting for about 16% of outstanding notes. Some $83.5 million of interest on a five-year dollar bond comes due Thursday, and failure to pay within 30 days may constitute a default. Evergrande also needs to pay a 232 million yuan ($36 million) coupon on an onshore bond the same day.

Evergrande’s shares lost as much as 19% on Monday, briefly taking its market value to the lowest on record. The stock closed 10% lower.

“With policy makers showing no signs of wavering on property market deleveraging, the latest headlines regarding Evergrande likely suggest that housing activity may deteriorate further in the absence of the government providing a clear path toward an eventual resolution,” Goldman economists led by Hui Shan wrote in a Sunday note.

Eoin Treacy's view -

The world is finally waking up to the contagion risk represented by China Evergrande. The big question which still needs to be addressed is who owns the company’s debt. Most of the $300 billion in US Dollar bonds were sold to international investors, while there is also an undisclosed sum in off balance sheet liabilities.



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September 17 2021

Commentary by Eoin Treacy

How China's Pollution Fight Is Roiling Commodities

This article from Bloomberg may be of interest to subscribers. Here is a section:

The growing importance of the environment in Beijing’s policy mix has left commodities markets caught between decelerations in both supply and demand. Iron ore prices more than halved between mid-May and mid-September as the steel production limits slashed demand for the steel-making ingredient. Aluminum, meanwhile, has jumped 46% so far this year as Chinese production -- more than half the world’s total --  of the energy-intensive metal is cut. The curbs on coal are particularly eye-catching because China has been wrestling with an unprecedented spike in the cost of the fuel. Coal futures in Zhengzhou hit a record in September, defying what should be a seasonal slowdown in demand. Any further cutbacks on output would run counter to the government’s pledges to stabilize prices by encouraging more domestic supply. It also would make another round of power rationing for industry more likely. Since coal is the major energy source in China for the production of fertilizer, its price has also soared.

Eoin Treacy's view -

The big question for many commodity investors is how serious is China about curtailing emissions? Perhaps a better question is how important is it to China’s leadership that the country look good ahead of the Winter Olympics in less than five months? Very important, is probably an understatement.



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September 15 2021

Commentary by Eoin Treacy

China Tech Crackdown, a short-term pain for the new growth phase?

Thanks to a subscriber for this note from UOB which may be of interest. Here is a section: 

As there is still no indication of the regulatory crackdown, investing in the tech sector at this current juncture could result in a high risk of catching falling knives. On the flipside, the attractive valuation and rapid growth of these China Tech companies may strike as a good bargain to long-term investors. The sell-off of some tech stocks were not a result of any fundamental changes, but rather investor sentiment, which could change again in a flash. First, we must understand the short and long-term impact of the crackdown. Here are 3 fundamental factors you may want to consider if you decide to buy the dip:

1. Will policy changes cause structural change to business’s model?
2. Companies’ valuation
3. Companies’ growth

Eoin Treacy's view -

The big question for investors is whether the pullback in Chinese tech companies is just another short-term purge prior to re-establishing the prior growth trajectory or whether it represents deeper issues.



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September 14 2021

Commentary by Eoin Treacy

Chinese Banks Are Dumping Dollars in Swap Markets, Traders Say

This article from Bloomberg may be of interest to subscribers. Here is a section:

The PBOC is expected to conduct its monthly MLF operation on Wednesday, with 600 billion yuan due. Last week a central bank official said that interbank liquidity should remain balanced in the coming months, damping speculation that there’ll be another cut in the required reserve ratio soon. 

Money market traders are more cautious this month as cash demand could rise due to quarter-end regulatory checks and before China’s Golden Week holiday in early October. If the maturing MLF is not mostly rolled over or covered by another liquidity injection, market sentiment is likely to be further impacted, said Frances Cheung, rates strategist at Oversea-Chinese Banking Corp. 

Evergrande Woes
Concern about the property sector amid the potential restructuring of China Evergrande Group -- the world’s most indebted developer -- could also be impacting swap rates. 

Market participants might be preparing for “the liquidity squeeze in crisis mode,” Mizuho Bank Ltd. chief Asian FX strategist Ken Cheung wrote in a note.

“Rising property sector concerns and specific credit concerns around Evergrande are raising pressure on banks’ liquidity management,” Eddie Cheung, senior EM strategist at Credit Agricole, wrote in a note. He expects onshore yuan liquidity conditions to remain tight in the near term.

Eoin Treacy's view -

Over the May holiday weekend, Didi snuck through an IPO in the USA while the Chinese regulators were away from work. That allowed the original investors to divest of at least some of their position before the company is dissected. As we approach the Mid-Autumn Festival Golden Week festival, where everyone will be on vacation for a week. and the stock market will be shut, it seems like an ideal time for creditors to make a move on Evergrande.



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September 10 2021

Commentary by Eoin Treacy

Shanghai Copper Stockpiles at Lowest in a Decade, Nickel Jumps

This note from Bloomberg may be of interest to subscribers. Here is a section:  

Copper inventories extend a drop to the lowest level in almost 10 years, while aluminum holdings also fell and nickel inventories climbed, according to weekly data from Shanghai Futures Exchanges.

Copper -11% to 61,838 tons, lowest since Dec. 2011
Aluminum -1.6% to 228,529 tons, lowest since Dec.
Lead +3.3% to record 204,008 tons
Nickel +45% to 8,608 tons, following a more than 30% gain the previous week

Eoin Treacy's view -

The realisation that contagion risk in the property sector could bring down the whole economy has refocused the attention of the Chinese administration on easing up on liquidity tightening measures. That has helped to stabilise the high yield sector and is also helping to improve the outlook for industrial resources.



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September 08 2021

Commentary by Eoin Treacy

Email of the day on China Evergrande's impending bankruptcy.

Hello Eoin, I really like your audios and try to listen to them almost every day and I find today's audio especially interesting because of your focus on Evergrande...and this is something I don't understand: how is it possible that a company of this size, being on the brink of bankruptcy, with a huge amount of USD debt (of which one can be sure it's on the books of big international players), keeps out of sight of the financial press...I can find almost nothing on this topic..and secondly: what do you think of the idea that the sudden drop of crypto was generated by the fact that Tether has usd evergrande bonds on its books...this seems to me a logical catalyst for this flash crash...

thank and keep up the good work...

Eoin Treacy's view -

Thank you for your kind words and this email which I believe will be of interest to the Collective. The reality is most journalists pay scant regard to the credit markets. On top of that writing negative, or cautionary, copy about China is dangerous for one’s career and particularly so if you happen to live in Hong Kong.    



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September 03 2021

Commentary by Eoin Treacy

Secular Themes Review September 2021

Eoin Treacy's view -

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on May 7th. These reviews can be found via the search bar using the term “Secular Themes Review”.

If it walks like a duck and quacks like a duck, it must be a duck. Wall Street is behaving like it is in a bubble. The most important thing is the bubble is still inflating.



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September 02 2021

Commentary by Eoin Treacy

Evergrande Contagion Fear Returns as Bonds Tumble Below 30 Cents

This article from Bloomberg may be of interest to subscribers. Here is a section:

One of the company’s most widely held bonds plunged by 6 cents on the dollar to 28.5 cents on Wednesday, a record low. The rout -- triggered by Evergrande’s warning of a potential default if its asset-sale plans fail to materialize -- accelerated during European market hours as private banks offloaded positions, traders said.

The collateral damage was concentrated in junk-rated developers including Kaisa Group Holdings Ltd., Fantasia Holdings Group Co. and Guangzhou R&F Properties Co. The latter company’s dollar notes due 2024 tumbled 4.1 cents to 66.8, according to Bloomberg-compiled data. Declines in the broader Chinese high-yield space reached as much as 2 cents on the dollar, halting a tentative rally over the past few days. 

Investors in China’s $12 trillion bond market have become fixated on Evergrande as they weigh the ramifications of a potential default by the world’s most indebted developer. With bondholders, banks, suppliers and homebuyers exposed to the real estate giant, any collapse could roil China’s economy. While regulators urged the company to resolve its debt woes in a rare public rebuke earlier this month, they have said little about whether state support is forthcoming. President Xi Jinping has been trying to wean the Chinese financial system off implicit government guarantees that fueled years of outsized borrowing.

Eoin Treacy's view -

China Evergrande is the biggest issuer of US Dollar denominated debt in the emerging markets. The financial markets are floating on a sea of Dollars. There are so many dollars in circulation that cross currency swaps are close to moving into a positive spread for the first time in years. Therefore, Evergrande’s problems are not arising because global liquidity is tightening. Instead, they are the result of government efforts to contain leverage ratios in the Chinese property market.



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August 26 2021

Commentary by Eoin Treacy

China's CSI 300 Slides, Weighed Down by Moutai, Wuliangye

This article from Bloomberg may be of interest to subscribers. Here is a section:

Shares of Chinese liquor makers fall, with Kweichow Moutai and Wuliangye among the biggest drags on the benchmark CSI 300 Index.

Moutai drops as much as 3.3%, the biggest drag on the CSI 300 Index, which declines as much as 1.1%

Wuliangye also loses as much as 3.3%, Jiangsu King’s Luck -6.2%, Shanxi Xinghuacun Fen Wine -3.7%, Anhui Gujing -3.9%

Moutai organized a week-long special training for its sales team, stressing on product price stability, ahead of the Mid-Autumn Festival next month and the National Day holiday in October, according to a Wednesday posting by a WeChat account on liquor industry news

Prices of all Moutai products have dropped marginally in Beijing recently, with its flagship liquor down about 200 yuan to around 2,800 yuan

Capital Securities analyst Gu Xiangjun says liquor shares have had sizable gains recently, adding pullback on Thursday could be “temporary”

Moutai added a total of 7.6% over a three-day rally through Wednesday and Wuliangye rose 5.4% during the period

Eoin Treacy's view -

Kweichou Moutai and Wuliangye are the largest and fourth largest stocks on the CSI 300. That might surprise some people since it is unusual for liquor companies to occupy such large weightings in large economies.



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August 24 2021

Commentary by Eoin Treacy

Iron Ore Spikes With Commodities Markets Set for Demand Revival

This article by Annie Lee and Mark Burton for Bloomberg may be of interest to subscribers. Here is a section:

Iron ore’s revival came after it lost about a quarter of its value in the past month, as China’s push to curb steel production hammered demand. But steel and other industrial commodities have rebounded this week, after China’s count of daily Covid cases fell back to zero and central bankers vowed to step up support for the real economy. Coking coal in China hit a record on Tuesday, while copper has also recovered amid signs that Chinese consumers are on a buying spree. 

“Iron ore just cannot be the only one lagging while everything else in steel space is massively bid,” Xiaoyu Zhu, a metals trader at StoneX Financial Inc., said by email. “After the price spike in coal products in the last two days, it’s hard for iron ore to stay quiet.”
 

Eoin Treacy's view -

Steel is as essential to economic development as it has ever been and that makes it a important component of global economic revival. The challenge for China is they have vast oversupply of manufacturing capacity for the alloy and rationalising it is an erstwhile priority.



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August 19 2021

Commentary by Eoin Treacy

Evergrande Slumps as Investors See No Bailout After Huarong

This article from Bloomberg may be of interest to subscribers. Here is a section:

Huarong’s bailout was reassuring for investors who went through months of agony guessing just how determined the Chinese government was in combating moral hazard. But even with $300 billion in liabilities that could roil banks, suppliers and home buyers, junk-rated Evergrande is seen as a separate case as authorities crack down on excessive leverage in the property sector. 

Investor concerns grew Thursday evening after Chinese regulators demanded Evergrande resolve its debt risks and refrain from spreading untrue information. People’s Bank of China and banking watchdog officials summoned the company’s executives, telling them to maintain operations and protect the stability of financial and property markets, according to a joint statement.  

“The Chinese government’s stance to prioritize social harmony and equality over corporate profit is becoming increasingly clear,” said Anthony Leung, head of fixed income at Metropoly Capital HK. “Evergrande is completely different in the sense that it is the poster child of an industrywide reckless risk-taking culture.”

Eoin Treacy's view -

China Evergrande has been investing in a wide number of non-core businesses for years and will likely be forced to sell all of its appreciated assets in order to avoid bankruptcy. That position as a forced seller leaves it in a weak position to get fair value. Therefore, the only conclusion is the company’s management are been punished for taking on excessive leverage and favoured companies will have the opportunity to pick up renewable energy, batter manufacturing and other positions at a discount.



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August 17 2021

Commentary by Eoin Treacy

Beijing Tightens Grip on ByteDance With Rare China Board Seat

This article by Zheping Huang for Bloomberg may be of interest to subscribers. Here is a section:

But the fact that the industry regulator can designate someone to the board of a prominent sector player may unsettle investors worried about the broader ramifications of Beijing’s clampdown. Even before Xi’s administration tightened its grip on the tech sector, ByteDance had grappled with American lawmakers’ accusations that TikTok in particular threatens national security and could aid Beijing in espionage efforts. In May, the month after the Chinese regulator took its stake, founder Zhang Yiming relinquished day-to-day control of his company to its closest lieutenant, a decision regarded as an attempt to distance himself from the growing turbulence at home and abroad.

“It intensifies worries about the government’s intentions for China’s internet sector and the concessions private firms may have to make,” said Michael Norris at consultancy AgencyChina. “It gives new context to Zhang Yiming’s decision to step down from his position as ByteDance’s CEO.”

Eoin Treacy's view -

It seems like the world is finally waking up to overt Communist Party control of Chinese corporations.  This has been going on for years. In 2019 the government placed party disciplinary officials in more than 100 large companies, including both Alibaba and Tencent. At the time that was viewed as an acceleration of the already existing trend. Here is a link to Comment of the Day on September 23rd 2019



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August 09 2021

Commentary by Eoin Treacy

China's Covid-Zero Strategy Risks Leaving It Isolated for Years

This article from Bloomberg may be of interest to subscribers. Here is a section:

In the short term, Chinese leaders have an incentive to maintain strict controls at least through next year: They don’t want any major outbreaks derailing the Winter Olympics or clouding a once-in-five-year Party Congress at which President Xi Jinping is expected to get a third term in office. The problem, however, is the rising economic and political costs in maintaining that policy indefinitely, particularly as the virus spawns new variants that can breach restrictions more easily.

“China will have to pivot from its containment strategy, sooner or later -- you can stay Covid Zero for a while, but you can’t stay Covid Zero forever, because the virus swoops in before you know it,” said Chen Zhengming, an epidemiology professor at the University of Oxford. “My worry is that they won’t actively pursue a tactic change as Covid Zero has become an entrenched mentality. Especially when you hold officials accountable, no one dares to go easy on the outbreak.”

Right now it’s nearly taboo in China to even suggest a different approach. In a commentary published over the weekend by a health news app run by the official People’s Daily newspaper, former health minister Gao Qiang called for stronger measures to keep the virus out of China while blasting the U.S.,
U.K. and other countries for easing too early.

“Their sole reliance on vaccination and pursuit of the so-called ‘co-existence with the virus’ have led to a resurgence of the virus,” he wrote. “This is a misstep in Covid decision-making caused by the deficiencies in their political mechanism and the result of upholding individualism.”

Eoin Treacy's view -

China’s spreading lockdowns are already having an economic impact as coastal manufacturing centres deal with a sudden shortage of workers. The longer lockdown orders remain in place the greater the potential the government will need to provide additional monetary assistance.



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August 06 2021

Commentary by Eoin Treacy

Secular Themes Review August 6th 2021

Eoin Treacy's view -

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on May 7th. These reviews can be found via the search bar using the term “Secular Themes Review”.

We are 17 months on from the panic low in 2020. At this stage it is quite normal to marvel at the speed of the advance and worry that the pace can’t possibly be sustained. The abiding sentiment is something like “surely, the world is not nearly as good as it was before the pandemic and therefore how on earth can prices be so high?”.

The world is not as good as it was before, millions of people have been deeply inconvenienced and many are traumatized by the events of the last 17 months. The counter argument is the quantity of money in circulation has only been matched during wartime and that has helped to inflate the price of everything. That’s the key to the argument. Having spent so much to achieve this recovery does anyone really believe central banks are going to endanger it? So where do we go from here?



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August 05 2021

Commentary by Eoin Treacy

Investors Are Ignoring a Dangerous Crackdown on Press Freedom

This article from Bloomberg may be of interest to subscribers. Here is a section:

Adding press freedom to the list may benefit those seeking investment too. When a newspaper closes, the local government’s borrowing costs rise because diminished scrutiny makes investors less comfortable, a 2019 report published in the Journal of Financial Economics found. 

Press freedom “is a very foundational thing that needs to be in place before you can have meaningful ESG metrics,” said Perth Tolle, founder of Life + Liberty Indexes, which invests in countries based on third-party rankings of various freedoms. The Freedom 100 Emerging Markets ETF, which tracks Tolle’s index, has no holdings in Turkey or China and also reduced its position in Poland in recent years as concerns have mounted over the country’s erosion of the rule of law. The benchmark MSCI Emerging Markets Index — which Tolle’s index has outperformed this year — has exposure to all three nations. ​

Most investors simply don’t factor in human rights concerns when it comes to allocating capital, Tolle added.

“The metrics are out there, the problem with Wall Street is that they don’t make any money out of those, and they don’t like it,” said Tolle, who was born in China and now lives in Texas. “In places that have no press freedom, do you think they’ll have freedom for stock or bond analysts?

Eoin Treacy's view -

Governance is Everything has been a central theme of this service for decades. It really is as simple as knowing that when you have a grievance, you will have recourse to a system of justice. In order for that to be possible you need property rights and respect for minority shareholder interests. You need an independent judiciary, so your case can get a free hearing. Then you need a free press to help publicise corruption and political overreach so they system can be sustained.



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August 03 2021

Commentary by Eoin Treacy

Email of the day - on investing for the long term.

Would be very interested in your thoughts for positioning an investment portfolio (retirement monies) at this point in time. It is increasingly difficult for me to envision what could spark a leg up in the US equity markets in the near term. A leg down at some point feels more probable, yet I am not one for market timing. Nevertheless, increased uncertainty and volatility look to be on the menu for an extended period of time as the markets and Fed wrestle with the curtailing of the liquidity which has fueled the market's run. Is simply pruning equity positions and building cash the most reasonable course of action?

The FullerTreacy service is outstanding and all the more valuable at times like these. Thank you for your thoughts.

Eoin Treacy's view -

Thank you for this question and I am delighted you are enjoying the service. I write a long form summary of my views on the first Friday of every month so I will take this topic up again there.

The big question for investors is how long will the steady rise in the stock market persist? It’s easy to be derailed by valuations and predictions of imminent doom. Instead, let’s focus on consistency and money flows.



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August 03 2021

Commentary by Eoin Treacy

Gaming? China's Big Crackdown Is on Big Capital

This insightful article by Shuli Ren for Bloomberg may be of interest to subscribers. Here is a section:

China may have questioned the ethics of for-profit tutoring companies in the past. But it did not really act until the enterprises were flooded with speculative venture capital money.

The government saw that as investors hijacking its state-dominant education sector with huge amounts of capital. And so it put a stop to that liquidity train. 

The market-oriented Chicago school of economics acknowledges that a benevolent dictatorship — with the assistance of cumbersome bureaucracy — can be as efficient for social and economic development as a well-ordered competitive marketplace. China — which sees itself as a benevolent authoritarian regime — has tried to maintain efficient capital markets. Now, it’s having second thoughts. In Beijing’s view, hot money is not heading where officials want it to go. Indeed, it was on the point of creating competing power centers that could rival the central government. 

So what can be read from these tea leaves? Stay away from where the hot money is going. Sooner or later, China will curb that enthusiasm and send the sectors into a crash landing. 

Eoin Treacy's view -

The primary aim of an authoritarian regime is to sustain single party rule. Everything else comes after that. China’s administration understands that online forums of any kind represent a point where state control can end. They are also keen to ensure that capital flows only to favoured sectors. Absolute control and the micromanagement it engenders, were some of the primary arguments against the potential success of communist regimes. It remains to be seen how far this trend of increasing authoritarianism will go.



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August 02 2021

Commentary by Eoin Treacy

Virus Flares in Wuhan as Delta Challenges China's Defenses

This article from Bloomberg may be of interest to subscribers. Here is a section:

It’s the biggest challenge to China’s strategy since the virus was first detected in Wuhan, the central Chinese city that saw the world’s first lethal outbreak. The country’s strict anti-virus measures, which include mass testing as soon as a case appears, aggressive contact tracing, widespread use of quarantines and targeted lockdowns, have crushed more than 30 previous flareups over the past year.

The arrival of the more infectious delta variant, however, is testing even that approach. The new strain may be exploiting an easing off in masking and social distancing in some places, since much of the country has been Covid-free for months. That, along with increased travel for summer vacation, created an environment where delta could gain a foothold.

China reported 99 infections on Monday, including 44 who tested positive but have no symptoms. Later in the day, seven more people were found to be infected in Wuhan, plus another in Beijing. By number of cases, it’s the biggest outbreak since a flareup in Hebei province in northern China in January, when
2,000 people were infected.

The broad spread is even more concerning, given the rise of cases in the highly protected capital and in Wuhan, whose virus- free status has been a source of pride in China. The seven new cases there are the first since China brought its original wave under control by locking down the city of some 11 million and
the surrounding Hubei province.

Eoin Treacy's view -

China’s stringency in locking down areas where infections are found and testing everyone is likely to keep the current spate of infections from getting out of control. However, the ease with which the Delta variant spreads represents a significant challenge because an increasingly large proportion of the country will need to be locked down. The biggest challenge is the Sinovac vaccine is considerably less effective than MRNA versions, so China will need to double down on its vaccination program before a long-lasting return to normal can be achieved.



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July 28 2021

Commentary by Eoin Treacy

China Convenes Banks in Bid to Restore Calm After Stock Rout

This article from Bloomberg may be of interest to subscribers. Here is a section:

The hastily arranged call, which included attendees from several major international banks, was led by China Securities Regulatory Commission Vice Chairman Fang Xinghai, people familiar with the matter said, asking not to be named discussing private information. Some bankers left with the message that the education policies were targeted and not intended to hurt companies in other industries, the people said.

It’s the latest sign that Chinese authorities have become uncomfortable with a selloff that sent the nation’s key stock indexes to the brink of a bear market on Wednesday morning. State-run media have published a series of articles suggesting the rout is overdone, while some analysts have speculated government-linked funds have begun intervening to prop up the market.

Eoin Treacy's view -

The actions taken against the tutoring sector might be well intentioned but to say it is an isolated incident is a step too far. The war on the private sector has been waged for more than a year already. The message is clear. There is now a clear limit on how large companies can grow. We might argue about the merits of this move from a societal perspective, but it makes a nonsense of growth-based valuations. That’s something all investors have to come to terms with.



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July 27 2021

Commentary by Eoin Treacy

July 26 2021

Commentary by Eoin Treacy

New Oriental Frogs

Thanks to Iain Little for this edition of his Global Thematic Investors’ Diary. Here is a section:

One of our HK analysts wrote this week: “the USA government has issued a joint advisory on the risks of conducting business, studying, and investing in HK, in a direct response to the June 2020 National Security Law (NSL)…which effectively crushed the autonomous region’s special freedoms. Certain multinationals in Hong Kong now face two-way political risk as the U.S.-China decoupling continues…Businesses will be forced to pick a side: adhere to U.S. sanctions and be penalized by China or potentially violate U.S. sanctions to maintain access to Chinese markets. Airlines will need to provide passenger information to authorities before flights depart…to prevent…political dissidents from leaving HK. The NSL allows authorities to conduct wiretaps or electronic surveillance, search and seize electronic devices, requires internet service providers to produce corporate or consumer data. The NSL has dissolved freedom of press in HK. The city’s public radio station is also now under tight censorship...all media based in HK now reflects the political agenda of Beijing. The U.S. has placed sanctions on several individuals and entities within HK, barring U.S. businesses and nationals from transacting with them.”

It is clear that under President-For-Life Xi, the primary condition for portfolio investment in China –the safety of one’s capital in a free system under a Rule of Law- does not, indeed cannot, exist.

This brings us back to the frog. The human tendency to cling onto hope and the status quo can be admirable, but it can also be a pathway to the poorhouse in investment. The destructive forces of late 1930s Germany were foreshadowed a decade before; “Mein Kampf” was published in 1925.

Why not invest in sectors that are actively encouraged by the Chinese state, such as semi-conductors, or which lie outside the ambit of state interference? For institutional investors tied to a global equity index, this is indeed an option, though the tendrils of the Chinese state reach everywhere. For private investors who have no compulsion to invest in China, and who see the world of investment as a “global beauty contest” it may be considered a risk too far. Other more beautiful shores, those that feel the radiation effect of a booming China, may offer more attractive prospects. ASEAN and the free-thinking members of the Trans Pacific Partnership spring to mind.

Eoin Treacy's view -

Sometimes investing is about the return of your money rather than return on it. That’s the challenge for investors in Chinese equities at present. It’s a big question because Chinese stocks represent significant weightings in the broad emerging markets universe. That’s true for both equities and bonds.



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July 20 2021

Commentary by Eoin Treacy

Email of the day on China's data security law:

What are your thoughts on the Data Security Law to be rolled out in Sept.? Yet another tool the Chinese government is using to control their equity markets?

Eoin Treacy's view -

Thank you for the attached article and this topic question. Here is a section from the Reuters article

"They're playing four-way chess here," said Samm Sacks, a cyber policy fellow at think tank New America.

"It's not just a national security policy, it's a much more deliberate plan asking 'how do we really tap into the value that flows from data from an economic standpoint?'"

A digital economy development plan released by the State Council in March lays out a five-part plan for "experimental stage data markets" and calls for authorities to "implement and strengthen the economic supervision" of internet platforms.

The powerhouse province of Guangdong last week announced plans to launch one such platform by year-end to trade and oversee the movement of data, including a customs hub for international transfers.

In the West we tend to think of individual personal and health data as the property of the individual. We share our information with service providers. In return they make products available that we place value in. Platform companies have monetised individual data points to create vast databases of files which are primarily used to sell advertising. China sees the potential but wants to ensure the market grows within arms’ reach of the Party.



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July 19 2021

Commentary by Eoin Treacy

Email of the day on South Africa reportedly from Clem Sauter:

“Dear friends,

Many of you outside of South Africa are wondering what is really going on. So here is a very simple outline. The thing is obviously far more complex and nuanced than can be set out in a brief note but this will give you some picture of what is really happening.

Following the 1994 democratic elections in South Africa, South Africa did really well economically until about 2008. That was also the year that Jacob Zuma was elected president of the ANC. At that point in time, some of us had a sense of disquiet already. But little did any of us understand then the extent of the corruption and weakening of government institutions that would follow. We have no clear idea of the extent of what was stolen during the Jacob Zuma years, other than that it is a stupendous sum of money which this country certainly cannot afford. Eventually however the internal tide within the ANC started to slowly turn against Jacob Zuma. On 18 December 2017 Cyril Ramaphosa was elected as the president of the ANC (and also subsequently became the president of South Africa). But it was a very narrow margin of victory.

The thing about Cyril Ramaphosa is that he is fundamentally a principled man. And certainly, determined to clean up the history of corruption we have seen since 2008. Various steps have been taken by him and the ANC under his guidance to give effect to this. One of the things that was done was to establish a commission chaired by Raymond Zondo, who is the Deputy Chief Justice of South Africa. The purpose of this commission was to investigate the corruption issues and to expose them to the light of day.

Jacob Zuma was required to appear in front of the commission. He effectively refused to do so. He was ordered by the Constitutional Court to do so. He defied the order of the Constitutional Court. The Constitutional Court in turn ordered his imprisonment for a period of 15 months for contempt of court. This, whatever you call it, is fundamentally the rule of law in action.

Initially there was resistance to imprisonment by Jacob Zuma and his supporters. A week ago, however Jacob Zuma submitted himself to imprisonment. And then all hell broke loose.

What you need to understand is that Jacob Zuma has his powerbase in KwaZulu Natal, where the riots have been at their worst. This is also, as the name will tell you, the home territory of the Zulu nation. And Jacob Zuma is a prominent figure in the Zulu nation. Within the Jacob Zuma camp, individuals set about instigating the so-called protests, riots and looting that you have seen in the media. To a significant extent they leveraged the problems of poverty and inequality in South Africa to achieve their ends. Very often in this country we have areas where many very poor people are resident adjacent to commercial complexes. This was an ideal combination to exploit. In addition to that there are the existing fissures along race lines that exist in our society which were also available to leverage. Audio files doing the rounds encouraged people to attack and destroy what are perceived to be white and white owned businesses. In the end though, many black businesspeople also suffered considerable losses.

The gameplan was to create a situation which would force the hand of the current government. Ideally, it would result in an overreaction by the security forces, with the result that many of the poor and vulnerable would be killed (which is what happened at Marikana a few years back). If that occurred, it would likely force the resignation or removal of Cyril Ramaphosa as president. Meaning the Jacob Zuma camp would have achieved their objective. This is one reason why the security forces have been so careful not to use excessive force in dealing with the riots and the looters.

While there is still a lot of instability in KwaZulu Natal and certain pockets in Gauteng, what is now starting to emerge quite clearly is that the gambit by the Jacob Zuma camp has failed. South African society of all walks has turned its face against this insurrection. In effect, an attempted coup has failed.

South Africans are a strange nation in many ways. They argue and fight amongst themselves but when pushed to the edge, they always pull together for the common good. This has happened again and again over the decades.

This has been perhaps a necessary test of our democracy and of the rule of law. Make no mistake but that South Africa has many very real challenges. But South Africa will pass through this and will put the locust years behind it.”

Eoin Treacy's view -

South Africa is a country of contrasts but it will survive as long people are willing to pull together during times of crisis. The significant threat to the rule of law that arose last week was a major challenge. The restraint shown by the armed forces, at least so far, is to be welcomed and highlights the fact that there are government institutions capable of acting responsibly and effectively. South Africa’s greatest institutional strength is the independence of the judiciary and a free press. Threats to both these pillars of governance never cease to arise but as long as they survive there is the potential for bounce backs following crises.



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July 13 2021

Commentary by Eoin Treacy

Chinese Tech Stocks Jump After Tencent Gets Deal Approval

This article from Bloomberg may be of interest to subscribers. Here is a section:

The gauge of the city’s tech stocks had fallen as much as 10% this month after China vowed to increase scrutiny over data collection and overseas listings.

“Regulators are still considering each deal case by case and not rejecting all of them. The sentiment is not that negative now,” said Castor Pang, head of research at Core Pacific Yamaichi. “Any good news will trigger buying on dips in the sector.”

Elsewhere, internet giant Meituan rose 3.4% after Caijing reported Monday that the company re-launched a ride-hailing app after industry leader Didi Chuxing was barred from offering new downloads. Short-video streaming platform Kuaishou Technology jumped 5.7% and Alibaba Group Holding Ltd. gained 4%.

Eoin Treacy's view -

Investors want to own Chinese tech shares because they believe they have the growth runway the USA’s tech behemoths had a few years ago. The temptation comes with a price attached because of China’s “rule by law” instead of “rule of law”. The tenor of regulation has the hallmark of being politically motivated but the trade is the Party may not be quite willing to kill the sector.



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July 06 2021

Commentary by Eoin Treacy

SoftBank, Biggest Investor in Didi, Sinks After China Blocks App

This article from Bloomberg may be of interest to subscribers. Here is a section:

It’s inevitable to see selling from investors who had been pinning their hopes on Didi,” said Tomoichiro Kubota, a senior market analyst at Matsui Securities Co. in Tokyo. “If it’s deleted from app stores, it’ll be a very difficult situation.”

China’s cyberspace regulator announced the Didi ban on Sunday, just two days after revealing a review of the company. The decision effectively requires the largest app stores in China to strike Didi from their offerings, though the current half-billion existing users can continue to order up rides and other services. Didi said the regulatory move may have “an adverse impact” on its revenue in China.

On Monday, regulators expanded the probes further to target Full Truck Alliance, which runs an Uber-like platform for truck-hailing, as well as Kanzhun Ltd. Full Truck Alliance, backed by Tencent Holdings Ltd. as well as SoftBank, raised $1.6 billion in its U.S. offering last month.

Eoin Treacy's view -

The Vision Fund was bloodied by the failure of WeWork. Since then, Softbank has since been eager to accelerate the pace of IPOs for the companies it invested in. Didi is a big one and there was no way they could risk missing out on a pay day.

Two weeks ago, the Chinese regulator warned Didi not to pursue its IPO. It appears large investors like Softbank and Uber pressured the company to file over the Communist Party centenary celebration to take advantage of a lull in regulatory enforcement. In doing so the company raised $4.4 billion in cash, achieved a valuation in excess of $70 billion and was promptly banned from Chinese app stores.



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July 02 2021

Commentary by Eoin Treacy

Secular Themes Review July 2nd 2021

Eoin Treacy's view -

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on May 7th. These reviews can be found via the search bar using the term “secular themes review”.

News today that Johnson & Johnson’s vaccine is effective against the delta variant should help to allay fears that the world is about to experience a round of upheaval similar to early 2020.

There is no question that the pandemic has acted as an accelerant. It forced migration and adaption to new conditions in a manner that might otherwise never have happened. Some of those changes will stick, others will fade away.

Everyone seems to think that the pandemic has to mean something and that we will never again get back to normal life. I don’t believe it. The surges back into social activity whenever restrictions are lifted is confirmation that humans are social beings. We crave physical contact and fellow feeling. That’s not going to change, even if we have a better appreciation for it today than since the demise of organised religion.  

As with every other crisis, the liquidity created to deal with the shock will remain in the system for much longer than it is strictly required. Central banks cannot afford to jeopardise the recovery they worked so hard to create. Meanwhile, populations everywhere are impatient for better conditions.



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July 01 2021

Commentary by Eoin Treacy

Xi Warns China's Foes Will Break Against "Steel Great Wall"

This article for Bloomberg may be of interest to subscribers. Here is a section:

“Xi used the speech to show that the CCP has wide support from the public and enjoys high-level popularity among Chinese people, which in turn shows that he himself has the support and popularity,” said Deng Yuwen, a former editor at the party’s Study Times journal. “Xi has also used the speech to send a stern warning to the U.S. and the West, and that’s when the audience responded most enthusiastically.”

Eoin Treacy's view -

100 years since the founding of the Communist Party is a momentous anniversary. It is a time for reflection and to think both about the lessons learned and the ambitions for the future. The primary importance of the century anniversary is the people who struggled to achieve victory at the dawn of the epoch are long dead. Those entrusted with responsibility today rest on the laurels of people they have little in common with because cultural memory of struggle is not the same thing as experiencing it in person.



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June 28 2021

Commentary by Eoin Treacy

India Shifts 50,000 Troops to China Border in Historic Move

This article from Bloomberg may be of interest to subscribers. Here is a section:

"The current situation on the border between China and India is generally stable, and the two sides are negotiating to resolve relevant border issues," Chinese Foreign Ministry spokesman Wang Wenbin told a regular press briefing in Beijing Monday in response to a question about troop deployment. "In this context, the words, deeds and military deployments of relevant military and political leaders should help ease the situation and increase mutual trust between the two sides, not the other way around."

The fear now is that a miscalculation could lead to an even deadlier conflict. Several recent rounds of military-diplomatic talks with China have made minimal progress toward a return to the quiet status quo that had prevailed along the border for decades.

“Having so many soldiers on either side is risky when border management protocols have broken down,” said D. S. Hooda, a lieutenant general and former Northern Army commander in India. “Both sides are likely to patrol the disputed border aggressively. A small local incident could spiral out of control with unintended consequences.”

The northern region of Ladakh — where India and China clashed several times last year — has seen the largest increase in troop levels, three of the people said, with an estimated 20,000 soldiers including those once engaged in anti-terrorism operations against Pakistan now deployed in the area. The reorientation means India at all times will have more troops acclimatized to fight in the high-altitude Himalayans, while the number of troops solely earmarked for the western border with Pakistan will be reduced.

Eoin Treacy's view -

India is a front-line country and NATO+ hope it will act as a counterweight to China in the region. That means it is likely to be afforded a helping hand in the form of aid, regulatory laxity and technology transfers to ensure it is capable of resisting Chinese adventurism.



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June 25 2021

Commentary by Eoin Treacy

China Banks Stockpile Record $1 Trillion of Foreign Exchange

This article from Bloomberg news may be of interest to subscribers. Here is a section:

Some officials “may see the foreign-exchange liquidity as a feather in China’s cap, and some may worry that the surge is flighty,” said George Magnus, a research associate at Oxford University’s China Centre. “It’s fine when the flows are coming in, but a big problem for financial stability when they try and go the other way.”

For Magnus, the increase in dollar deposits is “random and most likely temporary,” and will slow when other nations recover from the pandemic.

While it lasts though, the situation offers an opportunity for China to implement reforms and loosen its grip over its tightly controlled capital borders.

“China will take the chance of flush dollar liquidity to make its cross-border flows more balanced,” said Becky Liu, head of China macro strategy at Standard Chartered Plc in Hong Kong. “Policy makers in the coming two to three years will keep widening channels for funds to leave the country.”

Eoin Treacy's view -

China’s accumulation of Dollars as a result of the relative strength of the economy during the pandemic should naturally put upward pressure on the currency. The rally over the last year is at least a partial reflection of that. The big question is how do they loosen capital controls while also discouraging capital flight?



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June 24 2021

Commentary by Eoin Treacy

Tilting The Odds In Your Favour

This promotional piece from Baillie Gifford may be of interest to subscribers. Here is a section:

It may come as a surprise to learn that Tel Aviv (Israel), Vilnius (Lithuania), and Tallinn (Estonia) all rank in the top 50 cities in the world in Fintech. You may not yet have heard of many of their leading companies, but I’ll wager you will in the coming decade. Lithuania ranks number one in the world in terms of broadband speed and in the top five countries for Fintech innovation. Investment in the right infrastructure has given that country a head start it is not wasting.

Access to capital and need for less of it in today’s capital-lite, ‘free money’ world means more and more entrepreneurs, the geniuses who will lead the exceptional companies of tomorrow, no longer feel anchored to the US. 20 years ago, fewer than 15 per cent of Chinese students studying abroad felt compelled to return home, filled with ideas but lacking the capital to fund their ambitions. Today closer to 80 per cent see a much more favourable environment in which to put their western education to profitable use domestically.

Adding to the earlier comments on the popularity of the Hong Kong stock market, companies are increasingly eschewing an ADR listing entirely, preferring a Hong Kong local listing, with exchange regulators encouragingly supportive. For the Chinese company of the future, a dual listing may well mean H-shares (HK) and A-shares (mainland China).

In a world obsessed with buybacks (at the wrong time) and cost-cutting (at the wrong time), we look for investment and expansion. Here, the US is no longer the world leader it once was.

Eoin Treacy's view -

There is an exceptional amount of competition for attention in today’s market. The wall of money printed in the last year has refocused attention on relative performance of assets. Interest rates and currency movements play a big part in how well international assets fare versus US assets. That’s particularly relevant for large pools of US capital that have mostly stayed at home over the last decade.



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June 22 2021

Commentary by Eoin Treacy

Email of the day on China Evergrande's debt issues

Is China Evergrande an isolated problem or should we be concerned that this is a common problem throughout the Chinese economy (and thus much more to be concerned about)?

Eoin Treacy's view -

Thank you for this relevant question and this link to Grant’s free newsletter. Here is a section:

The unfolding Evergrande saga is taking a toll on the Chinese offshore bond market, as yields on the ICE BofA Asian Dollar High Yield Corporate China Index rose to 9.93% on Friday, up from 8.5% as recently as May 26 and far above the 4.65% on offer for the equivalent U.S. gauge. That 536 basis point spread marks a near-decade high, apart from a brief spasm during the March 2020 liquidation. Yet, that rough price action hasnʼt derailed insatiable investor appetite for yield: Chinese developers sold $20.3 billion in dollar bonds through June 2 per Refinitiv, up 16% from last yearʼs pace and running “completely contrary” to investor expectations for subsiding deal flow, Owen Gallimore, head of credit-trading strategy at ANZ, commented to The Wall Street Journal.

More broadly, as a debt-fueled fixed asset investment and a bloated financial system (featuring $50.3 trillion in banking assets as of March 31, more than half the $84.5 trillion in global GDP last year) stand as the centerpieces of the Chinese economic miracle, a brisk pace of economic growth is paramount for avoiding trouble.

Yet on that score, recent data are less than encouraging, as total social financing (i.e., aggregate credit and liquidity flows) came to RMB 1.92 trillion in May, light of the RMB 2 trillion consensus estimate to mark the third straight negative surprise. Similarly, M2 money supply growth registered at 8.3% year-over-year in May, down from 10.1% three months earlier and near the lowest level since at least 1996, while the credit impulse (or growth in borrowing as a percentage of GDP) slipped to 25.6% last month, down from 31% in February and the lowest reading since early 2020.

Quid pro quo is a dangerous mix when it comes to debt markets because one of the easiest ways to raise funds is to boost leverage through convenient relationships. If I need more funds, it is easy for me to buy a portion of your bank in return for your boosting leverage to invest in my company. The challenge is this is a simple transaction but the underlying web of interconnectedness across the developer/bank/materials/local and national government level is probably impossible to clearly identify.



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June 21 2021

Commentary by Eoin Treacy

China's tech workers pushed to limits by surveillance software

This article from Nikkei may be of interest to subscribers. Here is a section:

In China, technology adoption promises its swelling middle classes an easier, more productive life. But as companies bring productivity-enhancing tools into everyday office life, their efficiency is being channeled, not into leisure time, but into squeezing ever more value from employees.

Just as algorithms have come to govern the workdays of blue-collar warehouse workers at Alibaba Group Holding and food delivery riders for Meituan, elsewhere, white-collar workers are becoming affected by the creep of software-driven management and monitoring into their professional lives.

This is particularly the case in China's tech industry, where rapid technological development, paired with poor labor regulations, has created a potential for labor abuse. The big tech companies themselves, locked in cutthroat competition for new business opportunities, are pioneering these technologies and tools in their own operations. From hiring and goal-setting to appraisal and layoff, productivity-enhancing technologies look to quantify workers' behavior by collecting and analyzing extensive amounts of personal data.

Some scholars warn that some practices can be unethical, invading employees' privacy and burdening them with greater workload and mental stress. Others draw parallels to the fatigue faced by factory laborers during industrial revolutions, where workers chased the pace of machines.

"I felt that I was getting busier and having less time for myself," said the engineer Wang, looking back on his five years at Chinese internet companies.

Eoin Treacy's view -

Asian work culture is not something many in the West are familiar with. Long hours, arriving before the boss and leaving after him are normal work practices. Not taking holiday, an expectation to do whatever is asked and the assumption of absolute loyalty are common characteristics of working in Japan, China, South Korea and elsewhere. When a Japanese newspaper talks about potentially overworking individuals it is worth paying attention. Afterall Japan has a word for being worked to death. (karoshi - death by overwork).



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June 17 2021

Commentary by Eoin Treacy

Xi Taps Top Deputy to Lead China's Chip Battle Against U.S

This article for Bloomberg may be of interest to subscribers. Here is a section:

The task of coordinating that sprawling program now falls to Liu, who has to keep track of the relevant resources and drive the national strategy to help China achieve chip independence.

“For our country, technology and innovation is not just a matter of growth,” Liu told a three-story auditorium packed with China’s top scientists in a separate meeting in May. “It’s also a matter of survival.”

Xi is counting on his lieutenant to help China fend off growing threats from the U.S., which is seeking to take back chip industry supremacy. Under the Trump administration, sanctions were slapped on Chinese giants from Huawei to SMIC, cutting off their access to American technology and equipment crucial to designing and making advanced logic chips. President Joe Biden has also laid out a $52 billion plan to bolster domestic chip manufacturing, while calling on allies to join export controls aimed at curbing Beijing’s drive toward technology self-sufficiency.

Rival powerhouse nations like South Korea and leading corporations such as Taiwan Semiconductor Manufacturing Co. have also responded with their own spending plans, fueling the race to take the lead in the sector.

With traditional chipmaking facing a series of challenges from technology development to heavy capital investment, third-generation chips -- which use compounds such as gallium nitride and silicon carbide to significantly improve the performance of semiconductors that power a wide range of industries and products -- may offer China its best chance to overcome rivals, senior academic Mao Junfa told an industry event in Nanjing earlier this month.

“China couldn’t buy chips, even with cash in hand,” he said, referring to Washington’s sanctions on Chinese tech companies including Huawei. “The compound chip technologies could help China surpass rivals in the post-Moore’s Law era.”

Eoin Treacy's view -

A decade ago, China needed a domestic demand led recovery so social media, ecommerce and mass consumerism were promoted. That allowed Alibaba, Tencent etc to become some of the largest companies in the world. Their economic function has been realised and now efforts are underway to curtail their growth, lest they become a challenge to the political status quo. The opening of an antitrust investigation of Didi ahead of its IPO is one more example of how the growth of the most successful companies is being curtailed. 



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June 14 2021

Commentary by Eoin Treacy

China's Amazon for Autonomous Driving Data: Hyperdrive Daily

This article from Bloomberg may be of interest to subscribers. Here is a section:

Thanks to e-commerce, the world has gotten used to buying all sorts of daily necessities online. Automakers in China will soon be afforded the same convenience, with the ability to purchase must-have autonomous driving data from a central repository.

For that, credit must go the China Association of Automobile Manufacturers, which has been working on a Vehicle Data Platform with industry players for the past three years. Its launch is expected any day.
China, a pioneer in the promotion of electric cars, is exploring a credible and efficient way of storing, sharing and utilizing data to help automakers speed up their efforts in making autonomous driving a reality. In the intelligent and connected car space, data is as important to vehicles as crude oil is to internal combustion engine cars.

The issue is scale. Thousands upon thousands of terabytes of sensory data must be collected, analyzed and interpreted to produce the technology that ultimately allows cars to navigate roads, highways and obstacles themselves.

Currently, this valuable information is in the hands of individual companies, which are trying their best to use it to “train” the brains of intelligent vehicles as humankind races to that point where we can take our hands off the steering wheel altogether.

Eoin Treacy's view -

Tesla was welcomed into China with open arms. The company’s factory outside Shanghai was built in record time and every effort was made to remove regulatory roadblocks to begin production. Sales naturally followed and the move looked like a success. Then there was an accident and a loud public (orchestrated) outcry, with protestors standing on cars at a media junket. Now, a reservoir of self-driving data is being created and all companies active in the space will be expected to contribute what they have.



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June 09 2021

Commentary by Eoin Treacy

Warner-Discovery, French Deal 'Dramatically' Push M&A Up European TV Agenda

This article from the Hollywood Reporter may be of interest to subscribers. Here is a section:

While European broadcasters are still profitable, “and some very much so,” Godard highlighted, “savvy investors believe this is looking suspiciously like the high earnings of printed newspapers circa 2007, or a Wile E. Coyote run over the edge of the cliff. Broadcasters are capturing a declining share of total video audiences and their capacity to finance attractive content is shrinking as talent is bid up by SVOD operators.”

The analyst then outlined two consolidation options that have emerged in Europe.

“The first path — heralded by Bertelsmann RTL Group — would aim at creating national broadcasters with the content scale to operate compelling online platforms” via domestic acquisitions, Godard said, calling this the “possibly more defensive but also more realistic” option.

The second path is “more ambitious but lacking a credible backer,” he argued. It targets “the never achieved idea of pan-European synergies, leveraging increased international appetite for non-English language content” by merging assets across borders, something that the likes of Italy’s Mediaset and Vivendi have talked about. “But its champion, Italy’s Mediaset, lacks capacity to deliver,” Godard concluded.

“The group is already the biggest broadcaster in Italy and Spain and has built a 24 percent stake in Germany’s ProSieben, with the remaining shareholding fragmented,” he explained. “The problem is, if the cross-border strategy is sound, Mediaset may be its worst possible proponent. Besides bringing in strong leadership to its Spanish division, Mediaset never extracted significant synergies from its two Mediterranean units, despite their cultural affinity.”

Eoin Treacy's view -

National broadcasters survive because they have state backing and a captive audience. The value proposition they represent is tied to continued support from governments because they provide domestic language content. That does not transfer well internationally. This map of the 12 most spoken languages in the world suggest the biggest opportunities are in the Chinese, English, Spanish, Hindu-Urdu and Arabic speaking parts of the world. 



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June 04 2021

Commentary by Eoin Treacy

Secular Themes Review June 4th 2021

Eoin Treacy's view -

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on May 7th. These reviews can be found via the search bar using the term “Secular Themes Review”.

The pandemic panic is now one year in the rear-view mirror. It seems to have lost its ability to scare us so that begs the question what happens next? That’s the big conundrum

Some still believe that technology will solve all our problems and that the largest companies in the world will continue get even larger. Others believe that the inflation genie has been releases so it is inevitable that bonds will collapse in value. Others believe that we are in for a long grind of subpar growth because the debt is so large, it will sap the will to live out of every speculative asset. Others believe we are in a stock, commodity and property market bubble that could pop at any moment. Still other believe that cryptocurrencies are the solution, though no one is exactly sure what the problem is. So how do we make sense of these divergent views?

Personally, I have a strong feeling of déjà vu. In late 1999 and early 2000 I was selling Optus cable connections door to door in Melbourne. When I tired of backpacking, I went to London and within three weeks had started at Bloomberg. I was amazed at the speed of the Royal Mail. I saw an ad in The Times on a Wednesday for European sales people. I posted my CV that afternoon and had a reply back from Bloomberg delivered the next day. I had an interview on Monday and started on Tuesday. To say they were desperate for sales people is a gross understatement. I was in Belgium, visiting private banks, 10 days later. That was the top of the market and it was evidence of a true mania in the TMT (Telecoms, Media and Technology) sectors.

By the end of the Nasdaq bear market in 2003 the number of Bloomberg terminals being sold to mortgage bankers was surging. I was even offered a job by one. The Dollar was pulling back, there were fears about financial repression, China’s demand for commodities was only beginning, emerging markets were breaking out and gold was completing its base formation. A year later oil broke out.



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May 25 2021

Commentary by Eoin Treacy

China Stocks Jump Most Since July Amid Record Foreign Purchases

This article by Jeanny Yu for Bloomberg may be of interest to subscribers. Here is a section:

Beijing’s efforts to talk down commodity prices and impose more control over financial markets have sent investors into more defensive assets such as consumer stocks with steady cash flows. Liquor giant Kweichow Moutai Co., mainland’s biggest stock, rose 6% after Chinese media outlets reported its parent company aimed to double revenue by 2025.


“Beijing’s crackdown on commodity prices has forced more funds to seek shelter,” said Zhang Gang, a Central China Securities strategist. “Stocks such as Moutai are attractive given its stable earnings outlook and relatively reasonable valuation following this year’s correction.”

Eoin Treacy's view -

Two pieces of news on China hit the headlines today. The first is that Goldman Sachs and ICBC have formed a joint venture for wealth management clients. The second is the central bank is at least comfortable with the current strength of the Renminbi and may be inclined to allow it to appreciate further. Both are positive for asset prices.



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May 24 2021

Commentary by Eoin Treacy

How China Avoided Being Like Russia: The New Economy Saturday

This article from Bloomberg may be of interest to subscribers. Here is a section:

Weber: What puzzles me about the idea that the problem lies in Chinese “state capitalism” or China’s active state participation in the market is that this is not unique to China. Other states also have historically had quite extensive industrial policy and state engagement. It seems that the tensions between China and the West have been mounting since China moved from being the workshop for companies headquartered in the West toward trying to establish its own companies that can reach the technological frontier. That of course required the state, as China was starting from a position of relative technological under-development.

Browne: Local experimentation accounts for much of China’s early economic success. But these days, the approach is more top-down. Is that a problem?

Weber: First of all, I think we have to recognize that the 1980s is really this moment of great openness before a new paradigm has settled. This is a little bit like what we might be observing right now in the U.S. context, where suddenly all of the premises that we used to have in economics, especially in economic policymaking, seem to be up for debate. Obviously, this moment of openness cannot last forever. Eventually the mist settles, and you get a new, more consolidated system.

Eoin Treacy's view -

China is a country populated by large numbers of industrious, inventive people who are ruled by an autocratic regime that is terrified of the peasant revolts that have toppled many previous dynasties. The only way for them to ensure control is maintained is clamp down on any form of protest while simultaneously attempting to sustain productivity growth. It’s a tall order and will require continued political evolution if they are to succeed.



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May 07 2021

Commentary by Eoin Treacy

Secular Themes Review May 7th 2021

Eoin Treacy's view -

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on March 5th. These reviews can be found via the search bar using the term “Secular Themes Review”.

After a crash everyone is wary. We all seek to learn lessons from our most recent experience because it is the only way to help us emotionally move past the trauma. Coming out of the pandemic most investors wished they had sold everything at the first sight of virus news in early 2020 and bought everything back again following the crash. Today they are worried that there is another big shock waiting around the corner that will cause a repeat of pandemic panic.

The challenge for investors is less to learn from the most recent mistake but rather to know when to deploy the lessons learned. The best time to be wary about a massive decline is when no one is worried about it. The time to take precautionary action is when it seems like a waste of time and when you are most afraid of giving up on the potential for even better gains. That’s the best time to remember the experience of the crash but the interval of time and the positive reinforcement of experience in an uptrend make it difficult.



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April 28 2021

Commentary by Eoin Treacy

Hoisington Quarterly Review and Outlook

Thanks to a subscriber for report from Lacey Hunt which reiterates his long-term view that yields will continue to compress. Here is a section:

Before the pandemic, economic growth was decelerating as confirmed by a decline in world trade in 2019, one of the few yearly declines in the history of this series. While the huge debt financed programs were a response to the pandemic, the end result is that global nonfinancial debt increased to a record 282% of GDP in 2020. The 37% surge of debt relative to GDP was also a record. While this debt may be politically popular and socially necessary, it will weaken growth and inflation after a transitory spurt, which will lead to even more disappointing business conditions than existed prior to the pandemic.

The actual global debt situation may be worse than these numbers indicate because they include China, the world’s second largest economy. Scholarly forensic research indicates that Chinese GDP is overstated by at least 18%. Thus, the official Chinese debt to GDP ratio is suppressing the global numbers. A comparative analysis of money velocity confirms the suspicion about the Chinese figures. Money velocity in China in 2020 was 0.44 versus 1.19 in the U.S. Admittedly money and debt are not identical, but they are opposite sides of the balance sheet and the glaring gap is too much to be ignored.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Something that has been troubling me for a while is why has China chosen now as the time to clamp down on Alibaba and Ant Financial’s massive money market fund. The rationale that it was politically motivated and that the firm has become too big and powerful for the comfort of the Communist Party is tempting and probably holds some truth. However, the bigger question is whether the financial system needs to reabsorb the flows and be refortified because the debt overhang is much larger than investors are willing to give credence to?



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April 22 2021

Commentary by Eoin Treacy

China Blasts Australia's Decision to Cancel Belt and Road Deal

This article by Jason Scott for Bloomberg may be of interest to subscribers. Here is a section:

The Australian federal government scrapped both the memorandum of understanding and framework agreement signed between Victoria and China’s National Development and Reform Commission, Beijing’s top economic planning body, Foreign Minister Marise Payne said in an emailed statement Wednesday. She described the deals as “inconsistent with Australia’s foreign policy or adverse to our foreign relations.”

The step “is another unreasonable and provocative move taken by the Australian side against China,” the Chinese embassy in Canberra said in an emailed statement. “It further shows that the Australian government has no sincerity in improving China-Australia relations -- it is bound to bring further damage to bilateral relations, and will only end up hurting itself.”

Australia “basically fired the first major shot against China in trade and investment” conflicts, Chen Hong, director of the Australian Studies Center at East China Normal University in Shanghai, told the Communist Party-backed Global Times. “China will surely respond accordingly.”

China has lodged stern representations with Australia over the issue and reserved the right to take more action, Foreign Ministry spokesman Wang Wenbin said at a regular press briefing Thursday in Beijing.

Eoin Treacy's view -

China may successfully be able to cow smaller countries into submission by following a carrot and stick approach to infrastructure and trade development. Australia is a different story.



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April 13 2021

Commentary by Eoin Treacy

China Huarong's Plunging Bonds Point to Major Market Shift

This article from Bloomberg may be of interest to subscribers. Here is a section:

The big question now confronting investors is how much pain China’s government is willing to tolerate as it tries to wean the bond market off implicit guarantees. None of the state-owned companies that have defaulted so far -- including Peking University Founder Group Corp., which is ultimately controlled by China’s education ministry -- were considered as systemically important as China Huarong.

Chinese authorities have tried to strike a balance between instilling more market discipline and avoiding a sudden loss of confidence that might spiral into a crisis. But the tumult surrounding China Huarong, some of whose bonds are now trading below 80 cents on the dollar, highlights how quickly investor sentiment can deteriorate even at a time when the economy is strengthening.

“China’s credit market is entering a new era as SOEs are emerging as the main source of stress,” said Shuncheng Zhang, an analyst at Fitch Ratings. Whatever the outcome for China Huarong, policy makers will likely allow more defaults in the state sector to reduce moral hazard and cultivate a more mature debt market, he added.

Eoin Treacy's view -

Huarong was created as a bad bank, where the defunct loans of China’s banks were dumped 20 years ago. The generally accepted business model for these kinds of entities is they end up with hard to value assets and are given the time required to sell them at profitable rates. That’s how Ireland’s bad bank functioned in the aftermath of the Global Financial Crisis for example. The fact that Huarong is now running into trouble is reflective of the fact that it long ago departed from its bad bank foundation to imitate the business model of the banks it was designed to clean up.



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April 12 2021

Commentary by Eoin Treacy

Impatience

Eoin Treacy's view -

There is one theme that seems to be running through every asset class at present. Perhaps it is because we have been locked up for a year, and literally can’t wait until it is all over, but there is a distinct air of impatience in every circle of life. The pandemic has accelerated the decision-making process for everyone in every facet of our lives.

Mrs. Treacy and I have been discussing moving from Los Angeles for two years but there was never a push big enough to stir us into action. We looked at Las Vegas suburbs in 2019 and toured schools but my eldest daughter was accepted into one of the most prestigious high schools in Los Angeles, so we decided to linger.

The experience of living in Los Angeles during the lockdowns, from schooling to public safety, made us impatient for a change. Like many others we decided to move and have only been delayed by reapplying to schools for our daughters and finding a suitable home.



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April 08 2021

Commentary by Eoin Treacy

Scientists Claim To Discover 'Unexpected' New Viruses in Wuhan

This article from Futurism.com may be of interest to subscribers. Here is a section:

A team of researchers claims that it found evidence of multiple viruses — including several brand-new coronaviruses — in agricultural genomes from labs in Wuhan and other Chinese cities.

Genetic sequences of crops like rice and cotton released between 2017 and 2020 contained the entire genetic sequences of new viruses that seem to be related to human diseases like MERS and SARS, according to research the team shared in the preprint server ArXiv on Sunday.

The “unexpected discovery,” as the team put it, of the presence of dangerous human diseases in these agricultural research facilities, suggests that safety protocols may not be up to par — and, as the team argues, that viruses may have accidentally been released as a result.

It’s important to note that this is all coming from preprint research that hasn’t been vetted by an academic journal or other experts in the field. While four of the six study authors are affiliated with hospitals and universities in Spain, Canada, and Japan, the first two researchers listed in the paper are independent researchers without affiliations to any research institutes, and a third is affiliated with an LLC named after himself.

Eoin Treacy's view -

China is the wild west for genetic research. The level of control and care in research is a function of standards of governance.



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April 01 2021

Commentary by Eoin Treacy

Secular Themes Review April 1st 2021

Eoin Treacy's view -

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on March 5th. These reviews can be found via the search bar using the term “Secular Themes Review”.

The pandemic has been an accelerant. The full ramifications of what that means are becoming increasingly clear.

The pandemic took trends that have been in evidence for a while and exaggerated them. At the same time, it introduced new challenges which require new solutions.

Corporations operating without the safety net of cash on the balance sheet has been a feature of the markets for decades too. They continue to be bailed out when they get into trouble. There is no evidence that the trend of using all available means to buy back shares has ended. In fact, buybacks are back at pre-pandemic levels. Companies were touting “resiliency” last summer. It appears to have been just talk. Buybacks represent a powerful tailwind for stock markets that were absent for much of 2020 but are now back in force. 



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March 29 2021

Commentary by Eoin Treacy

A Tiger Cub's Huge Margin Call Means More Pain Ahead

This article by Shuli Ren for Bloomberg may be of interest to subscribers. Here is a section:

A market optimist might brush off Friday’s massive liquidation as a one-off event — a huge stumble by a fabled player now in decline. But this is no time to be optimistic. Hwang is representative of, not distinct from, the rest of the hedge fund crowd. His bets are also their bets. He may have gotten margin calls faster because he was more leveraged. But his positioning is by no means unique — and that commonality is where trouble may lie. 


Take the trades involved. Media companies such as ViacomCBS and Discovery have net exposures that are the “highest level we have seen since 2016,” according to a recent note from the prime brokerage unit at Morgan Stanley, which, alongside Goldman, managed some of the block trades on Friday. Last week, when ViacomCBS was using the steep run-up in its stock to sell new shares and bolster its balance sheet, the pressure on leveraged hedge funds must have been intense. 

Eoin Treacy's view -

Rising yields and companies selling additional shares at rich valuations puts pressure on leveraged trades. It was inevitable that the rotation out of stay-at-home champions, who saw a one-time boost to business, would see a reality check in 2021. Last week’s block trades were an example of that.

Credit Suisse and Nomura took the brunt of selling pressure in the financial sector because of their net exposure. However, exposure has been limited within the broader sector so far.



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March 24 2021

Commentary by Eoin Treacy

PBOC, BOJ May Be Driving Some of the Stock Rout Infecting Asia

This article by Wes Goodman for Bloomberg may be of interest to subscribers. Here is a section:

China hasn’t been this frugal in its cash offerings to banks in almost a year.

The People’s Bank of China has avoided net injections of short-term liquidity into the financial system since late last month, increasing concern that access to funds is becoming more difficult. The CSI 300 is headed for its steepest monthly loss in more than two years.

Japan’s Nikkei is falling for a fourth straight day after the BOJ said last Friday that it’s scrapping its annual target for stock purchases.

Stocks in both China and Japan had gotten used to these forms from the central banks. Now this backing, while not going away, is ebbing, and that could mean less central bank handholding for equities. 

Eoin Treacy's view -

The PBoC has been quite vocal in stating they do not want a bubble to form. They have very different priorities from the Federal Reserve. China’s administration wishes to preserve social harmony at all costs. In their view that is the only way to ensure the continued survival of single party rule. That means they will prioritise stability over asset price growth in the property or stock markets.

If that means restricting liquidity to the banking sector and curtailing the reach of the tech sector, those are deemed acceptable measures for China. The ChiNext Index is full of smaller companies that purportedly represent high growth. The Index has experienced it largest pullback since the lows and will need to find support soon if the benefit of the doubt is to be given to the recovery.



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March 24 2021

Commentary by Eoin Treacy

Taiwan Raises Red Alert Over Water, Cuts Chipmakers' Supply

This article by Debby Wu and Cindy Wang for Bloomberg may be of interest to subscribers. Here is a section:

Taiwan stepped up its fight against its worst drought in decades, further reducing water supplies to areas including a key hub of semiconductor manufacturing in the central part of the island in an effort to stop reserves from running dry.

The government issued its first red alert on water supply in six years Wednesday, warning that reservoirs in several parts of central Taiwan are running dangerously low. Authorities will cut the water supply to companies in two major science parks in Taichung by 15%, economics minister Wang Mei-Hua said at a briefing in Taipei.

Water will also be cut to non-industrial users across Taichung and Miaoli County two days a week, Wang said. The measures will come into effect from April 6.

While Taiwan Semiconductor Manufacturing Co. and Micron Technology Inc. both have chip-making operations in Taichung, Wang said the restrictions would not affect their production. TSMC’s headquarters further north in Hsinchu has been spared further restrictions for now.

TSMC says it plans to increase the amount of water it uses from tanker trucks but the new restrictions would not affect operations, according to an emailed statement. A Micron representative in Taiwan declined to comment, saying the company is now in a quiet period.

The relative dry spell is putting pressure on the Hua said government to ensure continued supplies to water-intensive industries, such as its crucial semiconductor manufacturing, at a time when global companies are clamoring for computer chips. A shortage of semiconductors has slowed output at automakers worldwide, prompting TSMC and its peers to run their fabs at close to full capacity to try and keep up with demand.

Taiwan’s usually ample supplies of water have plummeted after a significant drop in rainfall last year. The situation was further exacerbated by the fact that no typhoons made landfall in Taiwan in 2020.

Wang said earlier this month that Taiwan has sufficient water reserves to keep its technology companies operating smoothly until late May, when seasonal rains usually replenish supplies depleted during the drier winter months.

The meteorological situation adds to a new challenge to TSMC just as it’s grappling with competition from Samsung Electronics Co. and Intel Corp., which has unveiled a $20 billion plan to create a foundry business that will make chips for other companies.

Eoin Treacy's view -

The world is swiftly waking up to how dependent the global economy is on Taiwan. Rising geopolitical tensions, a global shortage of chips and water concerns mean there will be concerted efforts to ensure there is significant investment in additional sources of alternative supply.



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March 12 2021

Commentary by Eoin Treacy

Tencent, Baidu Fined by Antitrust Regulator for Past Deals

This article from Bloomberg may be of interest to subscribers. Here is a section:

“The message is clear that seeking government approvals in deals like these are a must.” said Ye Han, a partner at Beijing-based law firm Merits & Tree, who specializes in antitrust and M&A.

“While we haven’t seen cases where companies got broke up or mergers got unwinded, such evaluations are likely going on behind the scene.”

Didi Mobility Pte, a unit of ridehailing giant Didi Chuxing, and Japan’s SoftBank Corp. were also issued fines of 500,000 yuan each -- the maximum penalty possible -- for setting up a joint venture without permission. A ByteDance unit and its partner Shanghai Dongfang Newspaper Co. were also penalized the
same amounts for a 2019 partnership that created a video-copyright venture. ByteDance said the joint venture has since been canceled.

Technology companies like Tencent had previously carried out mega mergers and acquisitions through so-called Variable Interest Entity structures, which operate on shaky legal grounds. The new antitrust rules, accompanied by the fines handed down by the regulators, are a signal VIEs are now under
their oversight.

Eoin Treacy's view -

Being a Chinese billionaire is a dangerous profession. Wang Jian, head of HNA group, fell to his death while posing for a photo in France in 2018. Richard Lu, CEO of JD.com, was accused of rape in the USA the same year. Jack Ma fell foul of the Party late last year and disappeared from view for months. Lin Qi was murdered by a business colleague in December. In the eight years up to 2011 China executed 14 billionaires for various reasons including murder and graft.    



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March 11 2021

Commentary by Eoin Treacy

Email of the day on China and the coronavirus:

I am shocked at your remarks about China. It is not the China I know, and have seen develop over the last 40 years. A country where Harvard (Ash Center 9 July 2020) surveys found 95.5 percent of respondents were either “relatively satisfied” or “highly satisfied" with their government compared with 38% in the US.

The article from Politico is am interesting read, but does not mention that a partner of the Wuhan Institute was the US Galveston National Laboratory, of whose activities we know very little too.

Bad things happen in every country, including China and the US, but it behooves us to have a sense of proportion and get the facts both right and complete. Take one example: you mention a man in China who altered a gene to suppress HIV - he ended up in jail for breaking the rules.

I am sure you would embrace Deng Xiao Ping's instruction "find the truth through facts", and please recognize that most of the almost 1.5 billion people in China have just finished a perfecting satisfactory day!

And this from David Brown:                 

Thank you for this article and comment Eoin. On February 13 2020 I gave a presentation at my company's All Hands meeting about the viral epidemic in China. I made slides describing the evidence trail going back many years that indicated it was manufactured in the Wuhan lab. I removed those slides at the last moment as the meeting organiser gave me just 10 minutes for a 30 minute presentation - as you can imagine, the remaining content of the 1 hour meeting was trivia. Staff reaction to my presentation could be described as 'has he gone crazy!' They thought I was exaggerating. Nevertheless, I had them practice 3 days working from home, and we have not returned to the office since those days. I am sad to say that woke culture has come into the company as it has expanded over the past year with naive virtue-signalling new recruits, and I would be causing a storm if I now presented those slides showing the likely origin of the virus or showed them your comments. It's a sad world that has emerged in the past couple of years. I am glad I do not have many years to live.
 

Eoin Treacy's view -

Thank you both for these comments which are representative of the divide in perception. I might also add we all wish a mind such as David Brown’s will be with us for years to come.

No country is perfect and most have some part of their history they are embarrassed about.  However, there is the world of difference between countries with an independent judiciary and free press compared to authoritarian regimes. Freedom to discuss alternatives and to openly air grievances is the basis for western liberal society.



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March 10 2021

Commentary by Eoin Treacy

In 2018, Diplomats Warned of Risky Coronavirus Experiments in a Wuhan Lab. No One Listened

This article by Josh Rogen appeared in Politico and may be of interest to subscribers. Here is a section:

A little-noticed study was released in early July 2020 by a group of Chinese researchers in Beijing, including several affiliated with the Academy of Military Medical Science. These scientists said they had created a new model for studying SARS-CoV-2 by creating mice with human-like lung characteristics by using the CRISPR gene-editing technology to give the mice lung cells with the human ACE2 receptor — the cell receptor that allowed coronaviruses to so easily infect human lungs.

After consultations with experts, some U.S. officials came to believe this Beijing lab was likely conducting coronavirus experiments on mice fitted with ACE2 receptors well before the coronavirus outbreak—research they hadn’t disclosed and continued not to admit to. In its January 15 statement, the State Department alleged that although the Wuhan Institute of Virology disclosed some of its participation in gain-of-function research, it has not disclosed its work on RaTG13 and “has engaged in classified research, including laboratory animal experiments, on behalf of the Chinese military since at least 2017.” That, by itself, did not help to explain how SARS-CoV-2 originated. But it was clear that officials believed there was a lot of risky coronavirus research going on in Chinese labs that the rest of the world was simply not aware of.

“This was just a peek under a curtain of an entire galaxy of activity, including labs and military labs in Beijing and Wuhan playing around with coronaviruses in ACE2 mice in unsafe labs,” the senior administration official said. “It suggests we are getting a peek at a body of activity that isn’t understood in the West or even has precedent here.”

This pattern of deception and obfuscation, combined with the new revelations about how Chinese labs were handling dangerous coronaviruses in ways their Western counterparts didn’t know about, led some U.S. officials to become increasingly convinced that Chinese authorities were manipulating scientific information to fit their narrative. But there was so little transparency, it was impossible for the U.S. government to prove, one way or the other. “If there was a smoking gun, the CCP [Communist Party of China] buried it along with anyone who would dare speak up about it,” one U.S. official told me. “We’ll probably never be able to prove it one way or the other, which was Beijing’s goal all along.”

Back in 2017, the U.S. diplomats who had visited the lab in Wuhan had foreseen these very events, but nobody had listened and nothing had been done. “We were trying to warn that that lab was a serious danger,” one of the cable writers who had visited the lab told me. “I have to admit, I thought it would be maybe a SARS-like outbreak again. If I knew it would turn out to be the greatest pandemic in human history, I would have made a bigger stink about it.”

Eoin Treacy's view -

China is the wild west for medical research. The moral, ethical and safety considerations that slow down research in much of the developed world are ignored in China. That means if one wants to do research that would be frowned upon at home, you will find a welcome in China. The result is that all manner of experiments with new biomedical technology are taking place, often behind closed doors.



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March 05 2021

Commentary by Eoin Treacy

Secular Bull Market Investment Candidates Review March 2021

Eoin Treacy's view -

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on January 8th. These reviews can be found via the search bar using the term “Secular Themes Review”.

The rollout of vaccines to COVID-19 continues to accelerate and that will continue through the balance of the year and 2022. There is encouraging news about the number of different vaccines which have been approved and their success against variants. By the end of the year, the world will be inundated with doses which will provide at least some protection from the virus for anyone who wants it. That’s all the rationale any government needs for reopening the economy.

On Valentine’s Day 2020 Mrs Treacy and I went out for dinner with another couple. We talked about the news of a virus threat from China and how it could potentially cause ructions further afield. We told them we had stocked up on rice, meat, protein bars and batteries just in case. They thought we were crazy crackpots jumping at shadows.

It was hard to imagine then just how disruptive the decision to lockdown was going to be. A similar condition exists today. After a year of being confined to our immediate vicinity it is tempting to think this is how it will always be. The reality, however, is we are going to see a surge back to normalcy much quicker than most believe possible.

Humans are social animals and we yearn for social contact. We’ve been starved of that basic need for a year and we’ll overdose on it when we are able. That suggests we are looking at a boom in consumer activity over the coming couple of years.



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February 22 2021

Commentary by Eoin Treacy

China's Yield Appeal Catapults Yuan to Global FX Big League

This article for Bloomberg may be of interest to subscribers. Here is a section:

There have been many false dawns in China’s quest for the yuan to challenge other major currencies. But underpinning the explosion this time lies a torrent of capital flowing into China’s markets, fueled by a frantic search for returns with over $14 trillion of debt globally paying less than 0%.

That appetite for some of the highest-yielding government bonds in the Group-of-20 countries has elevated interest in China to fever pitch and is generating demand for liquidity from investors looking to finance and hedge their investments. It’s also spurring volatility and attracting speculators who overlooked the market for years.

“It’s certainly a top currency in terms of the flow that we’re seeing,” said Kevin Kimmel, New York-based global head of electronic FX at Citadel Securities, one of the world’s biggest market makers. “Trading activity in the yuan has increased significantly.”

The shift comes as China continues to relinquish control -- albeit slowly -- of its tightly-managed currency, a linchpin of Beijing’s long-term plan to encourage its greater global use. China is considering easing restrictions on citizens investing in securities outside its mainland, a move that would facilitate two-way capital flows.

Eoin Treacy's view -

Capital is both global and mobile and it will always flow to the most attractive assets. There are no developed markets where one can pick up a yield above 1% in an appreciating currency. Investors have no other choice than to look elsewhere.

In doing so, they have to weigh how likely it is that tensions with China are likely to escalate. With a new US administration, the potential for surprises is lower and therefore the risk from investing in the renminbi is reduced but not eliminated. This trend of Renminbi strength has been very persistent since March and some consolidation will occur eventually.



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February 18 2021

Commentary by Eoin Treacy

China blocked Jack Ma's Ant IPO after investigation revealed

This article from the Times of India may be of interest to subscribers. Here is a section:

The main reason seemed to be “growing unease in Beijing over Ant’s complex ownership structure and the people who stood to gain most from it”. The Street Journal said in a report on Tuesday.

“Behind layers of opaque investment vehicles that own stakes in the firm are a coterie of well-connected Chinese power players, including some with links to political families that represent a potential challenge to President Xi and his inner circle” the report added.

One of Ant’s investors is Boyu Capital, a private equity firm founded in part by Jiang Zhicheng. Jiang Zhicheng is the grandson of former Chinese leader Jiang Zemin, Many of Jiang Zemin’s allies have been purged in Xi’s anticorruption campaign, though he remains a force behind the scenes the WSF said in its report.

Eoin Treacy's view -

Many people are familiar with the fact that Chairman Mao was a prodigious reader of history. Few comment on the kind of history he focused on. His primary interest was in courtroom politics. He understood that he was now the emperor and that the only way to hold onto power would be to ensure his supporters were rewarded for their efforts. At the same time, they had to compete with one another for favour which strengthened his position. That’s how every dynasty functioned up to that point and he reintroduced the system of palace politics.



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February 12 2021

Commentary by Eoin Treacy

Email of the day on Chinese Banks and geopolitical risk

Always enjoy the service, Eoin and look forward to the daily updates. To better my understanding of reading charts, would you please walk me through the consistency pattern you see in the Commercial and Industrial Bank of China's chart that make its purchase, "shooting ducks in a barrel", as a very wise man would say. Thank you.

Eoin Treacy's view -

At The Chart Seminar we begin by trying to imagine ourselves as the judges at an international beauty contest. We are only interested in the most beautiful charts. Those that have either truly consistent trends or the potential to develop them. Now ask yourself what is beautiful above ICBC’s chart?

The share was listed in Hong Kong in 2006 and since then it has done nothing but range in a very volatile manner. That’s neither beautiful nor consistent, so we need to ask whether there is anything occurring that may change the outlook?



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February 09 2021

Commentary by Eoin Treacy

Email of the day - on investable ideas

Firstly, thanks for the terrific service, it’s been so helpful in these turbulent times.  I was interested to read the subscriber feedback in today's comment. 

I agree with the comment that sometimes it’s quite hard to find investable ideas in some of the themes that you so accurately pick up on. 

For example, soft commodities/agricultural products, some direction as to likely beneficiaries would be really helpful.  I’m a UK based investor, so in general like to stick to our market or Europe and it has not been easy.  Perhaps Bayer?  ABF but the Primark exposure is confusing.  In the Eoin’s Favourite’s section of the chart library some of the categories do help, but there’s doesn’t seem to be one directly related to rising soft commodity prices other than farm machinery or fertilisers?

Lithium is another one where I am struggling to find the right investment, even though I looked at your collection of related companies.  As the price seems to have broken out of a long-term downtrend some suggestions as to likely beneficiaries would be really helpful, although understand that one must also do one’s own research.

With Bitcoin, which I’m not that keen to buy, but you highlighted the Greyscale Bitcoin Trust which although I’ve not invested in it was really helpful to have an idea related to the concept you were right about. 

Hope this feedback helps and thanks again.

And

I found the criticism yesterday, a bit harsh.  There are few sites that provide the breadth and depth that we get from FTM.  Here, in West Aust, I wake each morning to your market summary of the principal events.  I find it cost effective for that point alone.

The suggestion above regarding missed opportunities is one worth pursuing, not so much regarding the chartbook but for highlighting early chart indications of emerging opportunities.  I feel that perhaps FTM may report facts that are available elsewhere but the site is not fully exploiting your chart analysis skills that are not available elsewhere.  You should exploit your strengths and don't reproduce stuff that is, or soon will be, in the media. We all want to know where Eoin Treacy sees emerging or imminent changes. 

Eoin Treacy's view -

Thank you both for this feedback and your kind words. I am a firm believer in giving the people what they want. Afterall, why else would one subscribe. Let me address the challenges in the order they are outlined in the above emails.



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February 09 2021

Commentary by Eoin Treacy

Hong Kong Interesting Charts

Eoin Treacy's view -

There are two parts to most markets at present. There are the strong trends which have been in evidence for years and continue to perform. The new IPOs and SPACs also fall into this category because many of these companies have seen their values trend higher for years before they sought listings.

The other category are the catch-up plays which are only now just breaking out of their respective bases.



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February 05 2021

Commentary by Eoin Treacy

Secular Bull Market Investment Candidates Review February 2021

Eoin Treacy's view -

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on January 8th. These reviews can be found via the search bar using the term “secular themes review”. 

Highlighting secular themes has been a hallmark of this service for as long as I have been a part of it. I first met David Fuller in Amsterdam in 2003. He was giving a talk to Bloomberg’s clients and we went out for dinner that evening. His way of looking at markets, with a focus on suspending ego to see what the market tapestry is telling us, answered all of the questions I had about how to interpret
markets. I felt honoured when he asked me to come work with him a few months later.

The easy way to find secular themes to is to look at long-term ranges. Prices can so sideways for a long time, sometimes decades, and the whole asset class can be forgotten by investors. These kinds of markets need a catalyst to reignite demand. Once that new theme gathers enough pace, prices break on the upside because the supply side is not capable to responding in a timely manner to the new phenomenon. Sometimes that’s because they don’t believe in the new trend, or it may be because they simply do not have the financial wherewithal to expand. As the power of the new catalyst gathers, it takes time for supply to respond and the market will proceed higher until there is a robust supply response. That can take a long time because demand continues to grow as the new theme increases its dominance of investor attention.



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January 26 2021

Commentary by Eoin Treacy

China Asset-Bubble Warning Threatens Stock Frenzy in Hong Kong

This article Richard Frost for Bloomberg may be of interest to subscribers. Here is a section: 

In mainland markets, a gauge of interbank borrowing costs jumped 36 basis points to 2.78% on Tuesday, the highest level in a year. Futures on Chinese government bonds due in a decade were poised for the biggest decline since September, while the CSI 300 Index of shares in Shanghai and Shenzhen, which has been approaching 2007’s record high, fell 2%.

“The PBOC wants to bring investors out of the euphoria caused by abundant liquidity in December,” says Xing Zhaopeng, an economist at Australia & New Zealand Banking Group. “The PBOC is unlikely to loosen its purse strings at least this week, which will make cross-month liquidity very tight.”

PBOC Governor Yi Gang on Monday said the central bank will seek to support economic growth while limiting risks to the financial system -- a continuation of its existing policy stance. Yi said China’s total debt-to-output ratio climbed to around 280% at the end of last year.

Eoin Treacy's view -

In many respects China is running conventional monetary policy. The economy has been spared from an epic contraction and therefore the requirement for outsized liquidity to support growth is less compelling than in the OECD. It remains likely that China will be the first major economy to raise interest rates after the pandemic abates.



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January 25 2021

Commentary by Eoin Treacy

Signaling No Change in China's Course, Xi Warns Against Cold War

This article from Bloomberg news may be of interest to subscribers. Here is a section:

“To build small circles and start a new Cold War, to reject, threaten or intimate others, to willfully impose decoupling, supply disruptions, or sanctions, or to create isolation or estrangement, will only push the world into division and even confrontation,” he said.

Xi’s speech had been widely anticipated for the tone it would set for relations between the world’s biggest economies over the next four years. Though Xi did not name Biden by name, many of his comments were clearly targeted at the new U.S. administration.

Xi repeated many of the same talking points about multilateralism and “win-win” outcomes that he deployed in his last address to Davos four years ago, days before Donald Trump’s inauguration, but he also signaled that he does not intend to change course in the face of U.S. pressure.

“Each country is unique with its own history, culture and social system, and none is superior to the other,” Xi said, warning against imposing a “hierarchy on human civilization” or forcing one’s own systems onto others.

Eoin Treacy's view -

This all sounds very reasonable and is a perfect example of China’s efforts to exude a façade of reasonableness. Perhaps it would be better to measure China’s actions in the four years since Xi’s last speech to Davos where much the same call to embrace appeasement was made.



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January 20 2021

Commentary by Eoin Treacy

Jack Ma's Brief Video Chat Prompts a $58 Billion Sigh of Relief

This article by Lulu Yilun Chen, Coco Liu and Abhishek Vishnoi for Bloomberg may be of interest to subscribers. Here is a section:

Much about the future of China’s most famous businessman remains unclear. Yet analysts said Wednesday’s video was a sign that worst-case scenarios -- such as jail time for Ma or a government takeover of his companies –- are probably now off the table. It’s unlikely Ma would have participated in the event without at least tacit approval from Beijing; state-run media including the Global Times were among outlets that posted snippets of his talk or wrote stories about his appearance.

“There’s still a lot of uncertainty on regulators’ next moves, but this does mean the status of Jack Ma is much better than a lot of people speculated,” said Fang Kecheng, a professor at the Chinese University of Hong Kong.

Eoin Treacy's view -

There is no getting around the fact that Ant Financial prospered in the grey area between consumer finance and traditional banking. By offering a higher interest rate than banks, it grew into a massive deposit taking operation without having to submit to banking regulation. When he publicly showed distain for banking regulators, it signalled Ma had forgotten that his success was based on the ability of Ant Financial to operate outside the regulatory umbrella of the banking sector. They dropped the hammer on him and the company will now be part of the regulatory environment. It remains to be seen if the rule breaking on deposit rates will still be tolerated. 



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January 19 2021

Commentary by Eoin Treacy

Weekly Warm-up: More Stimulus May Mean Less for Markets

Thanks to a subscriber for this report from Mike Wilson at Morgan Stanley which may be of interest. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subcsriber's Area.

The US government expects to issue about $1 trillion more bonds than the Fed currently expects to buy in 2021. Without a clear move to boost the amounts committed to the bond buying program yields will inevitably rise. It’s a simple supply and demand argument. Of course, no one really believes the Fed will fail in its commitment to provide assistance while unemployment is well above trend.



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January 18 2021

Commentary by Eoin Treacy

Email of the day - on the early stages of a secular bull market.

Until the beginning of last year you often spoke on the theme of the early stages of a secular bull market. David had begun speaking about it as long as 4 years ago. But with the onset of the pandemic, you have been largely silent about it. Has it stalled or, in your view, already peaked?

Eoin Treacy's view -

Thank you for this important question. In October 2008, I remember sitting at my desk and looking at the calculation that the S&P500 was sitting on the widest overextension relative to the 200-day ever. Acceleration is always a trend ending and the crash signalled the beginning of the bottoming process. By the time Wall Street reached its nadir in March 2009 many instruments were well off their lows and by the end of the year the leaders were making new highs.

Gold, commodities, ASEAN and technology took off. Of these, technology is the only one which had uninterrupted staying power all the way through the bull market to date.  

I started writing Crowd Money in 2011. At the time a host of big international companies, with global franchises, that dominate their niches were breaking out of long-term ranges. It was a clear signal that a new secular bull market was underway. By the time the book was published in 2013, it was still a minority view that a new bull market was underway.



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January 05 2021

Commentary by Eoin Treacy

China's Steel Plan Puts Challenge to Australian Iron Ore Miners

This article from Bloomberg may be of interest to subscribers. Here is a section:

China has already been moving steadily to secure iron ore resources. Some of its overseas mines include Sinosteel Corp.’s Channar mine joint venture in Australia and Shougang Group Co.’s Marcona project in Peru. But the focus is on Guinea, where some of China’s biggest state-owned firms are close to getting the go-ahead to develop Simandou, the world’s largest untapped iron ore deposit.

“It’s entirely feasible that China could raise its self-sufficiency in virgin and secondary iron units to 45% from its current level of just over 30% if it successfully develops the Simandou project,” said Navigate Commodities co-founder Atilla Widnell.

To reach 45%, Simandou has to produce 200 million tons a year to displace imports from other countries, said Widnell. Still, “it may be a stretch” to achieve that level by 2025 given geographical challenges in the area, and he estimates that with the current pace of development, the goals will be reached by 2030.

Eoin Treacy's view -

Ownership of Simandou has been a point of contention for much of the last decade. Payments to politicians by Rio Tinto eventually resulted in the company selling all of its interest to Chinalco in 2017. That provided China with full ownership of the asset bloc and it has no issue with making payments to politicians to ease the development of the mine.



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January 04 2021

Commentary by Eoin Treacy

Byron Wien and Joe Zidle Announce the Ten Surprises of 2021

This press release may be of interest to subscribers. Here is a section:

5. The economy develops momentum on its own because of pent-up demand, and depressed hospitality and airline stocks become strong performers. Fiscal and monetary policy remain historically accommodative. Nominal economic growth for the full year exceeds 6% and the unemployment rate falls to 5%. We begin the longest economic cycle in history, surpassing the cycle that lasted from 2010 to 2020.

6. The Federal Reserve and the Treasury openly embrace Modern Monetary Theory as their accommodative policies continue. As long as growth exceeds the rate of inflation, deficits don’t seem to matter. Because inflation increases modestly, gold rallies and cryptocurrencies gain more respect during the year.

7. Even as energy company executives cut estimates for long-term growth, near-term opportunities are increasing. The return to “normal” increases both industrial activity and mobility, and the price of West Texas Intermediate oil rises to $65/bbl. Rig counts increase and energy high yield bonds rally soundly. Energy stocks are among the best performers in 2021.

8. The equity market broadens out. Stocks beyond health care and technology participate in the rise in prices. “Risk on” is not without risk and the market corrects almost 20% in the first half, but the S&P 500 trades at 4,500 later in the year. Cyclicals lead defensives, small caps beat large caps and the “K” shaped equity market recovery unwinds. Big cap tech is the source of liquidity, and the stocks are laggards for the year.

9. The surge in economic growth causes the 10-year Treasury yield to rise to 2%. The yield curve steepens, but a concomitant increase in inflation keeps real rates near zero. The Fed wants the strength in housing and autos to continue. As a result, it extends the duration of bond purchases in order to prevent higher rates at the long end of the curve from choking off credit to consumers and businesses.

Eoin Treacy's view -

If we contrast this list of potential surprises, I get the feeling they are less ambitious than in years past. I have heard the rumour from many quarters that President Trump is planning to set up his own TV station and there is plenty of speculation that the entire effort to overturn the election is to create a sound footing for a re-run at the title in 2024.



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December 30 2020

Commentary by Eoin Treacy

Email of the day on asymmetric risks

"SMIC could be blocked from 7nm or more advanced technology while overseas rivals like Taiwan Semiconductor Manufacturing Co. dominate the market."

​With the massive importance of semiconductors, one wonders if this alone could be the trigger that leads to China invading Taiwan - and the Third World War!

Eoin Treacy's view -

Thank you for this question which raises an important topic. Semiconductors are a major choke point for China’s goals of achieving and sustaining global hegemony. Therefore, they will do whatever is necessary to secure supply lines. There are only a limited number of ways that can be achieved. Domestic manufacturing is difficult, time consuming and expensive. However, they are certainly pursuing this goal by funding new companies, attracting talent from overseas and developing next generation technologies like quantum computing.



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December 22 2020

Commentary by Eoin Treacy

Lidar Makers Jump After Report on Apple's Autonomous Car Plans

This article by Divya Balji and Crystal Kim for Bloomberg may be of interest to subscribers. Here it is in full:

Some lidar suppliers gained Tuesday after Reuters reported that Apple Inc. plans to build a self-driving car for consumers and is tapping outside partners for elements of the system as it develops its own battery technology.

Apple is approaching companies for some parts, including lidar sensors that provide autonomous cars with a real-time, 3-D view of the world, the report said, citing unidentified people familiar with the matter.

Lidar supplier Luminar Technologies Inc. rose as much as 12% on Tuesday, while Velodyne Lidar Inc. surged 16%. Blank-check firms that are bringing more lidar players to the market also advanced: InterPrivate Acquisition Corp. climbed 17%, while Collective Growth Corp. jumped as much as 24%.

Apple has been working on driverless car technology since 2014, but pared back its ambitions from a full-fledged vehicle in 2017, Bloomberg News has reported. Since then, Apple has been working on the underlying autonomous system. The company has been deciding whether to attach this system to its own car, or existing vehicles, or to partner with an established carmaker, Bloomberg News reported earlier this month.

Eoin Treacy's view -

Apple enjoys an almost 40% gross margin on its iPhones and tablets. Porsche has about a 47% gross margin on the 911 and Ferrari has a more than 50% gross margin on its cars. Tesla’s is 16.5%. Toyota’s is 18% and Volkswagen’s is 19.5%. No mass market producer has been able to achieve margins on the scale technology companies are accustomed to.



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December 22 2020

Commentary by Eoin Treacy

How Chinese Chip Giant SMIC Can Evade Trump's Newest Crackdown

This article from Bloomberg news may be of interest to subscribers. Here is a section:

Within the company, engineers are scrambling to assess the fallout and figure out workarounds to secure the equipment it needs, much like Huawei did two years prior, another person familiar with the matter said. At issue is the administration’s focus on drawing a line at 10-nanometer technology, banning the sale of equipment intended for use in more advanced processes. SMIC could conceivably repurpose 80% of older-generation gear to crank out more advanced chips, but that tactic won’t sustain production for the longer term and much depends on how far President-elect Joe Biden decides to take the rules, a third person close to the situation said, asking not to be identified discussing sensitive matters.

“The company has already got critical equipment and materials needed to continue production,” said Xiang Ligang, Beijing-based director-general of the Information Consumption Alliance. “In the past, China wasn’t too sensitive about the technological bottlenecks it has. But now, Beijing is fully aware of the potential damage and is determined to solve these issues.”

Chinese government-backed SMIC, a manufacturer of chips for global names from Qualcomm Inc. to Broadcom Inc., relies on U.S. gear for its longer-term technology road map. While its engineers may be able to sustain research and output in the short run, the latest sanctions basically freeze its capabilities while the industry advances. If a Biden White House takes it to the max, SMIC could be blocked from 7nm or more advanced technology while overseas rivals like Taiwan Semiconductor Manufacturing Co. dominate the market. The heightened scrutiny may also discourage clients leery of dealing with the uncertainty.

Eoin Treacy's view -

Self sufficiency in semi-conductors is a central policy objective for China. It is the basis on which the country seeks to compete with the USA in future. China may be able to do without Australian coal or wine but it has no hope of competing effectively on the geopolitical front without securing the supply line for technology’s basic ingredients.



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December 21 2020

Commentary by Eoin Treacy

'Politics come first' as ban on Australian coal worsens China's power cuts

This article from the Financial Times may be of interest to subscribers. Here is a section:

Yiwu, a city in eastern China known for making products such as flags and badges, has not only switched off all its street lights during the evening but has forced factories to cut working hours by up to 80 per cent until the end of this year.

“We are not living a normal life when our factory can only work two days a week and the streets are dark at night,” said Mike Li, owner of a plastic flower factory in Yiwu.

Chinese authorities have blamed these problems on a combination of an unusually cold winter in parts of the country and high energy demand.

Power plants, however, said their operation had also suffered from the suspension of Australian coal imports.

Official data show Chinese plants obtained about 3 per cent of their thermal coal from Australia last year. The ratio, said an official at trade association the China Electricity Council, could exceed 10 per cent in more developed provinces that are drawn to the high quality of Australian coal.

“The import ban doesn’t make economic sense,” said the official.

Eoin Treacy's view -

Christmas is not a holiday in China but Chinese New Year is. Therefore, December is the time when orders are placed for delivery in January because nothing tends to get done over the two-week Spring Festival break. The slowdown in manufacturing capacity across many of China’s major industrial areas is likely to have a knock-on effect of delivery timelines towards the end of the quarter. That suggests inflationary pressures will mount as a result of this trend of putting politics ahead of the economy.



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December 17 2020

Commentary by Eoin Treacy

China's Central Bank Going It Alone Spurs an Influx of Capital

This article by Tom Hancock and Enda Curran for Bloomberg may be of interest to subscribers. Here is a section:

One reason it hasn’t leaned on its balance sheet as much as global peers is the PBOC largely handed the task of increasing money supply and lowering interest-rates to state-owned banks. It cut bank reserve-requirements, meaning they had more cash to dole out in loans.

With the economy growing again, policy makers have signaled they want a more sustainable pace of credit expansion. By contrast, the Fed, European Central Bank and Bank of Japan have all announced plans to maintain and step-up stimulus into the next year.

“Advanced economy central banks will try to use negative real interest rates and inflation to erode the real value of their sovereign debt,” said Andrew Sheng, chief adviser to China’s Banking and Insurance Regulatory Commission. “This is why real money flows will go to the economies that show growth, higher productivity” and steady monetary and exchange rate policy, he said.

The difference in yield between Chinese government bonds and U.S. Treasuries is already near record levels, with many market players expecting the gap to widen further next year

Eoin Treacy's view -

The Chinese approach to the pandemic has been to allow companies to issue a lot more debt and to give banks the leeway to facilitate that practice. That has occurred despite the uptick in corporate defaults. That has amounted to an addition CNY5 trillion in debt issuance this year or an increase of about 40% over the peaks of the last four years.



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December 15 2020

Commentary by Eoin Treacy

Email of the day on third party perspectives on the US/China competition

Very interesting interview for those interested in our regional and international affairs Just ignore the first 3 minutes of the intro in the Malay language if you don't understand Bahasa.

Worth 93 minutes of you time. Download & watch at your leisure.

Kishore Mahbuhani, a Singaporean diplomat, Mahbuhani is brilliant.

Eoin Treacy's view -

Thank you for this video which I agree highlighted a number of interesting themes. The challenge for governments in Asian countries is how to balance the demands for loyalty coming from the world’s superpowers. That’s a particular challenge for those that have historically depended on US support for markets and military protection. They now see their primary growth engine in China while China’s Belt and Road program is the primary source of FDI for many potential projects. 



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December 10 2020

Commentary by Eoin Treacy

Chinese Household Debt Surges Through the Pandemic

This article by Mike Bird for Bloomberg may be of interest to subscribers. Here is a section: 

China’s household debt ballooned in the first half of the year, rising by about $380 billion, according to new Bank for International Settlements data. That increase was almost four times as large as the second-place U.S. And it compounds one of China’s biggest economic vulnerabilities.

It has been widely reported that China’s industrial production and exports have helped to power its recovery this year. But the other leg of the recovery is the continued rapid rise of real-estate investment, which is set to outstrip GDP growth again in 2020, as it has in 16 of the past 17 years.

Interest rates this year fell sharply in most countries, but the People’s Bank of China has resisted this trend. That means that whereas borrowers in the U.S. were at least able to refinance real-estate loans, Chinese borrowers are left with largely unchanged debt-servicing costs.

Eoin Treacy's view -

A common sence way of looking at the market is to buy the assets that domestic investors favour. In the USA that’s equities, in Germany it's bonds and in China it is properties. A portfolio made up of that mix would have done rather well over the last few decades.



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December 09 2020

Commentary by Eoin Treacy

Extracting Growth Alpha in Emerging Markets

This report from Jennison Associates may be of interest to subscribers. Here is a section:

Generally speaking, an investor’s primary motivation for making a portfolio allocation to emerging market equities is the desire to tap into superior structural growth. However, equity market returns rarely correlate tightly to economic growth. There are many attractive secular growth companies in emerging markets—and they exist regardless of the economic growth conditions of their domestic economies. Investors wanting to tap into the powerful long-term benefits of superior structural growth trends can benefit from seeking out highly active strategies. In our experience, a strategy succeeds by continuously seeking out innovative companies with superior growth trajectories. A clear and consistent investment philosophy and repeatable investment process can help to ensure that a portfolio reflects bottom-up decisions that incorporate the superior growth available in EM equities.

The growth opportunity set is bigger than is generally thought. EM companies face challenges and problems different from those of their developed market counterparts, but their distinct circumstances often spur them to innovate and disrupt existing practices. EM companies are moving up the value chain, from export-oriented business models built on low-cost labor and cheap manufacturing to higher-value-added businesses based on technological and scientific innovation. Low recognition of these dynamics by investors and indexes creates an opportunity for growth-minded investors. Add to the mix companies that execute well to exploit a superior economic growth backdrop, and the opportunity set expands.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

China’s success in developing domestic champions has been truly impressive and they are now among the largest companies in the world by market cap and revenue. Success in expanding internationally has been limited in the technology sector to the Chinese diaspora because the global market tends to be much more competitive than the sheltered environment domestically.



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December 04 2020

Commentary by Eoin Treacy

Secular Bull Market Investment Candidates Review

Eoin Treacy's view -

On November 24th I posted a review of candidates I believe likely to prosper in the emerging post-pandemic market. It was well received by subscribers so I will post an update on my views on the first Friday of the month going forward. That way subscribers can have an expectation that long-term themes will be covered in a systematic manner and will have a point of reference to look back on.

Media hysteria about the 2nd or 3rd waves has not led to new highs in the number of deaths. The success of biotech companies in deploying vaccines means there is going to be a substantial recovery in the economic activity in 2021 and going forward.

The stay-at-home champions saw their sales growth surge in 2020. It will be impossible to sustain that growth rate in 2021. That’s particularly true for mega-caps. One-way bets on the sector are likely to work less well in the FAANGs going forward.



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December 03 2020

Commentary by Eoin Treacy

Email of the day on the space race

This is an interesting if alarming piece about China and adds weight to your observations about war.

Eoin Treacy's view -

Thank you for this interesting article which may be of interest to subscribers. Here is a section:

In the meantime, though, the distinction between Earth and space has been blurred. Geopolitics used to be Earth-bound, world war was war between continents. Now it isn’t. China is ahead on this. Clausewitz is taught in its military academies and so too is the Prussian argument for a Feldherrenhügel, the mound from which commanders can direct battles. Space is the ultimate “higher ground” from which all strands of a battle can be monitored and directed. That is why the moon is more than a sentimental prize.

A senior Chinese general was quoted in 2016 as saying “the space between the Earth and the moon will be strategically important for the great rejuvenation of the Chinese nation”. The head of the Chinese lunar mission says “if we don’t go there now, even though we are capable of it, then we will be blamed by our descendants. If others go, then they will take over.”

 



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November 23 2020

Commentary by Eoin Treacy

Email of the day - on the politicisation of monetary policy

I hope life for you in California is more fun than it is here in England. But let's hope we really are past the low point as far as the virus is concerned. I had thought that would be true for economies too, but this latest move by President Trump (summarised in the article by Ambrose Evans Pritchard) does raise questions. With this move, which asset classes do you think will benefit and which will lose on a 3-6 month timescale?

Best wishes to you and family. 

Eoin Treacy's view -

Thanks for the well wishes and this article which may be of interest to the Collective. All is well with us since the streets were blessedly free of protestors following the election. I guess they got the result they wished for. Here is a section from the article:

He instructed Fed chairman Jerome Powell to return the unused portion of a $454bn (£342bn) account approved by Congress during the market meltdown in March. This seed money gave the Fed $4.5 trillion extra lending power under a policy of 10:1 leverage and had an electrifying effect on market confidence, helping avoid the errors made in 2008.

Krishna Guha from Evercore ISI said the Fed’s market stabilisation policy had been politicised. Congressman Bharat Ramamurti, a member of the House oversight committee on stimulus, called Mr Mnuchin’s move an unjustified and ideological decision by the treasury department.

The Fed retains its monetary policy powers and can purchase further US treasury bonds but that is a blunt tool at this juncture unless it is married to aggressive fiscal expansion, which the Republican Senate has vowed to block.

The Fed is concerned that more QE will chiefly inflate asset prices without doing much to help the real economy, exacerbating social inequality.

Congress stripped the Fed of its discretionary powers under Article 13 after the Lehman crisis. The Fed now needs permission from the treasury to go beyond its normal mandate. This was granted immediately during the panic in late March.



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November 19 2020

Commentary by Eoin Treacy

The Next Phase of the V

Thanks to a subscriber for this report from Morgan Stanley. Here is a section:

#1: A global synchronous recovery: We expect a broad-based recovery, both geographically and sectorally, to take hold from March/April onwards. Driving this synchronous recovery will be a more expansive reopening of economies worldwide and the extraordinary monetary and fiscal support now in place. Global GDP, already at pre-COVID-19 levels (based on seasonally adjusted GDP levels), continues to accelerate and is on track to resume its pre-COVID-19 trajectory by 2Q21. We expect China to return to its pre-COVID-19 path this quarter, and the US to reach it by 4Q21.

#2: EMs boarding the reflation train: After a prolonged period in which EMs have faced a series of cyclical challenges, macro stability is now in check. With the COVID-19 situation improving in a broad range of EMs, their pace of recovery is catching up. EM growth rebounds sharply in 2021, helped by a widening US current account deficit, low US real rates, a weaker dollar, China’s reflationary impulse, and EMs ex China's own accommodative domestic macro policies.

#3: Inflation regime change in the US: We see a very different inflation dynamic taking hold, especially in the US. The COVID-19 shock has accelerated the pace of restructuring, creating a significant divergence between the output and unemployment paths. With policymakers maintaining highly reflationary policies to get back to preCOVID-19 rates of unemployment quickly, wage pressures and inflation will pick up from 2H21. We expect underlying core PCE inflation to rise to 2%Y in 2H21 and to overshoot from 1H22, with the risk that it happens sooner.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

With millions of people out of work it is easy to form a gloomy picture of economic potential. However, even at a US unemployment rate of 10%, there are still 90% of people with jobs. Moreover, many people who have held onto their employment have boosted savings this year.

When 90% of people come through a crisis in OK shape and a significant minority come out ahead, there is ample scope for a significant bounce back in activity. There is a great deal of pent up demand in the global economy and all that cash on the side lines is fuel for bull markets. The fact monetary and fiscal policy is aimed to improving the outcomes for the remaining 10% suggests loss credit and low rates are here to stay.



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November 16 2020

Commentary by Eoin Treacy

RCEP: A new trade agreement that will shape global economics and politics

This article by Peter A. Petri and Michael Plummer for the Brookings Institute may be of interest to subscribers. Here is a section:

CEP will connect about 30% of the world’s people and output and, in the right political context, will generate significant gains. According to computer simulations we recently published, RCEP could add $209 billion annually to world incomes, and $500 billion to world trade by 2030.

We also estimate that RCEP and CPTPP together will offset global losses from the U.S.-China trade war, although not for China and the United States. The new agreements will make the economies of North and Southeast Asia more efficient, linking their strengths in technology, manufacturing, agriculture, and natural resources.

The effects of RCEP are impressive even though the agreement is not as rigorous as the CPTPP. It incentivizes supply chains across the region but also caters to political sensitivities. Its intellectual property rules add little to what many members have in place, and the agreement says nothing at all about labor, the environment, or state-owned enterprises — all key chapters in the CPTPP. However, ASEAN-centered trade agreements tend to improve over time.

Southeast Asia will benefit significantly from RCEP ($19 billion annually by 2030) but less so than Northeast Asia because it already has free trade agreements with RCEP partners. But RCEP could improve access to Chinese Belt and Road Initiative (BRI) funds, enhancing gains from market access by strengthening transport, energy, and communications links. RCEP’s favorable rules of origin will also attract foreign investment."

Eoin Treacy's view -

The ratification of a free trade deal between China and much of Asia and Australasia is a significant bonus for its ambition of enmeshing as many countries as possible in dependency on its economy. China is already a major destination for exports from the wider region as well as a source of manufactured goods. This agreement will expand its role in the debt/credit markets too.



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November 12 2020

Commentary by Eoin Treacy

Email of the day - on Asia ex-China

With your comments yesterday on the video commentary about investing in China, I would appreciate some assistance. Bearing in mind your comments, and David's mantra that "Governance is everything", I do have some concerns about my investments in China. They are all through ITs (such as Aberdeen Asian Income and Schroder Oriental Income) but all have high exposure to China + Hong Kong (16% and 30% for those 2 ITs). Do you know of any income funds that invest in Asia excluding China? Many thanks for your continuing excellent service.

Eoin Treacy's view -

Thank you for this question which gets to the root of many of the conflicting arguments around monetary policy, growth prospects and geopolitics. Interest rates have been risible in Europe, Japan and North America or more than a decade. That promoted growth opportunities over value and in the process compressed yields. Hong Kong and the wider Chinese market offer some of the most attractive income opportunities globally and are not easily replicable.



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November 09 2020

Commentary by Eoin Treacy

Welcome back America!

Thanks to a subscriber for this article by James Breiding. Here is a section:

Resolution requires concerted and consistent effort over a long period of time. It took 25 years to reform Finland’s primary education system before it topped the league in PISA scores. Singapore achieves superior health care outcomes at 25% of the cost of the US and 40% of Europe thanks to a system which gives consumers “skin in the game”.  It’s now thirty years in the making. Denmark’s commitment to wind power dates back to the 1970’s when the benefits were egregiously uneconomic. More than half of its energy is now from renewable sources. Ontario Teachers’ Pension Plan has evolved over thirty years since Lamoureux convinced Canada’s labor unions that the fund needs to attract and pay the best people from Goldman Sachs and Blackrock to work for them, rather than paying them fees.  Ontario Teachers’ has had an annualized total-return of 10% since reforms were made in 1990, and retirees’ pensions are fully funded with 100% inflation protection provided on all pensions.

It may be far-fetched to think that small, successful, experimental nations can fill this vacuum of leadership, but the world is begging for consistent leadership and a positive example, so an opportunity presents itself to step up.  

Eoin Treacy's view -

There is a good reason small countries tend to succeed in niche areas, and are often more successful than larger countries on specific metrics. They have to. Israel, South Korea or Switzerland have spent lifetimes grappling with the uncertainty of geopolitics. They understand the reality that if they don’t succeed on their own no one is going to help them.

Ireland is small rainy island on the tip of Europe, without a commitment to education and active courting of FDI, coupled with low corporate taxes and light regulation it would be a very dreary place indeed.



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November 06 2020

Commentary by Eoin Treacy

Xi Eyes Sub-5% Growth Rate in New Vision for Chinese Economy

This article from Bloomberg news may be of interest to subscribers. Here is a section:

“It is extremely difficult to project growth 15 years out and, although we view growth of 5%-6% over 2021-2025 as likely, growth above 5% over 2026-2035 appears quite challenging,” Nomura Holdings Inc. economists, led by Ting Lu, wrote in a note.

To overcome some of those challenges, the Communist Party is promising to build the nation into a technological powerhouse and focus on quality growth over speed. Key to that objective is developing a robust domestic market and becoming self-reliant in technology -- especially in chips, the building blocks for innovations from artificial intelligence to fifth-generation networking and autonomous vehicles.

Eoin Treacy's view -

The greater the size of the economy, more difficult it is to grow quickly. That is why standards of governance are so important. If graft and political ideology gets in the way of innovation and the pass-through effect to a greater wealth effect the headwinds to growth only growth stronger. China has demonstrated repeatedly that subservience to the party comes ahead of every other factor. That was particularly clear this week with the smack down of ANT Financial’s IPO.



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November 03 2020

Commentary by Eoin Treacy

China Tells Ant It Must Meet New Capital Requirements Before IPO

This article from Bloomberg may be of interest to subscribers. Here is a section: 

Ant will have to make changes that include capital increases at its lucrative micro-lending units, people familiar with the matter said. Ant must also reapply for licenses for the units to operate nationwide, the people added, asking not to be identified discussing a private matter.

It’s unclear how extensively Ant will have to overhaul its business to meet all of China’s new regulations, which took effect on Nov. 1 and were designed to rein in systemic risks posed by companies that straddle at least two financial business lines. Representatives for Ant and China’s securities regulator couldn’t immediately comment on the issue after business hours.

The Shanghai Stock Exchange cited a “significant change” in the regulatory environment when it unexpectedly put a stop to Ant’s $35 billion share sale on Tuesday, upending what would have been the biggest market debut in world history. The move came just two days before Ant was due to start trading and a day after Jack Ma, the company’s billionaire founder, was summoned to a rare joint meeting with the country’s central bank and three other top financial regulators.

Eoin Treacy's view -

ANT Financial ignored banking regulations to grow its business at an exponential rate. The government was willing to look the other way for a long time which created the illusion they were willing to allow the company to continue to flourish as an innovation within the broader technology sector. That impression was dispelled today.



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October 30 2020

Commentary by Eoin Treacy

China's Fifth Plenum: Reading the Initial Tea Leaves

This article from the Center for Strategic & International Studies may be of interest to subscribers. Here is a section:

As expected, the plenum declared that China had met the critical political goal of becoming a “moderately prosperous society” in 2020. By the end of the year, China’s GDP is expected to reach nearly 100 trillion yuan (RMB)—equivalent to $14.3 trillion—a figure higher than the plan’s forecast of RMB 92.7 trillion, which makes China’s economy in nominal terms about 66.7 percent the size of that of the United States in 2019 ($21.4 trillion), up from 40.6 percent the size of the United States in 2010. China reportedly lifted 55.75 million people out of poverty and created 60 million jobs in urban areas over the past half-decade. By the end of 2020, there will be basic medical insurance coverage for 1.3 billion and basic pension support for nearly 1 billion citizens.

Looking ahead, the plenum emphasized that the 14th Five-Year Plan will build on the 13th Five-Year Plan’s principles of innovation, regional coordination, green development, international openness, and social equity. That said, there was a distinct emphasis on strengthening the domestic economy. There was no mention of a growth rate target; instead, the country will focus on improving quality and raising productivity. The plan will highlight China’s need to gain technological independence; become a powerhouse in manufacturing, cyber, and the digital economy; and raise China’s international competitiveness. At the same time, China will need to expand domestic consumption as a share of the economy, which will be dependent on raising wages, building a more complete social safety net, and expanding economic opportunities in rural China.

Eoin Treacy's view -

The middle-income trap has been escaped by only a handful of countries. South Korea, Singapore and Taiwan spring to mind. They have mustered the wherewithal to evolve their governance structure to become more efficient and successfully transitioned to high-end manufacturing and services. Relatively small populations relative to the scale of their exports has been a significant aid in achieving those goals.



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October 29 2020

Commentary by Eoin Treacy

The Great Reset

This edition of Tim Price’s always enjoyable missive may be of interest to subscribers. Here is a section:

Markets were born free but are now everywhere in chains. Cash deposit rates are now derisory, but with added bail-in risk. Bond yields are likely to remain squashed indefinitely, helped by governmental funny money. So, cash and bonds are largely out of the question. The one market too big for even the world’s central banks collectively to kick around is the currency market. So, we would not be surprised to see some kind of reset develop there. Our way of anticipating that reset is to own precious metals and the shares of sensibly priced mining concerns in “safer” jurisdictions. Because we anticipate an ultimately inflationary outcome due to those aforementioned torrents of funny money, we value claims on the real economy in the form of equity ownership of cash-flow generative businesses run by principled, shareholder-friendly management with an excellent track record of capital allocation, especially when such stocks can be bought at a discount to their inherent worth. And because we frankly have no clue how the Great Suppression will necessarily play out, we hold uncorrelated (systematic trend-following) funds that offer the potential to zig when the markets finally and conclusively zag. Our watchword: if in doubt, diversify.

Not the sort of commentary we would prefer to be sending out into the world. But sometimes spades must be identified as such. On a more positive note, some wisdom from the ages: this too shall pass. It just better gets a bloody move on.

Eoin Treacy's view -

The question for investors is whether the ECB announced additional stimulative action to support the economy or arrest the advance of the Euro. The region’s plan for climbing out of the lockdown-induced recession will be founded on exports. A weaker currency would certainly help and the ECB is delivering.



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October 16 2020

Commentary by Eoin Treacy

RBA Inflation Twist Suggests Economy Can Run Hotter on Low Rates

This article by Michael Heath Bloomberg may be of interest to subscribers. Here is a section:

Australian central bank chief Philip Lowe’s move to emphasize current inflation rates rather than projections suggests the economy will be allowed to run hotter with interest rates staying lower for longer.

Lowe conceded that assessing the outlook is problematic when inflation dynamics aren’t well understood and the world is so uncertain.

“We will now be putting a greater weight on actual, not forecast, inflation in our decision-making,” Lowe said, outlining the RBA’s latest thinking on prices in a speech on Thursday that hinted at further easing to come.

Annual inflation has averaged 1.7% since Lowe took the helm at the Reserve Bank of Australia in 2016, versus a target of 2%-3% over time, and has now dropped below zero.

 

Eoin Treacy's view -

Central banks have no choice but to pursue inflation with every tool they have available to them. Not only has the pandemic unleashed massive uncertainty, but their is no plan for how the debt taken on to combat it will be repaid.



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October 08 2020

Commentary by Eoin Treacy

ECB Warns Against Complacency on Depressed Prices, Euro Gain

This article by Piotr Skolimowski for Bloomberg may be of interest to subscribers. Here is a section:

European Central Bank officials agreed at their latest policy meeting to avoid any complacency in their battle against the recession, and to counter investors’ perception that the euro would inevitably strengthen.

The account of the Governing Council’s Sept. 9-10 meeting showed officials fretting that currency gains had offset some of their monetary stimulus, with a “material impact” on the outlook for consumer prices. Chief economist Philip Lane said inflation expectations were at “very depressed” levels and at risk of falling further.

“In the prevailing environment of high uncertainty, keeping a steady hand with respect to monetary policy was seen as most appropriate,” according to the document published Thursday. “At the same time, the case was made for keeping a ‘free hand’ in view of the elevated uncertainty.”
 

Eoin Treacy's view -

One of David’s most insightful adages is “no country wants a strong currency, but some need a weaker one more than others”. Between March and August, the USA did the most to devalue its currency. The massive supply of money supplied accounted for about half of all global liquidity. That has been one of the primary factors behind the Dollar’s decline. No currency exists in isolation so if the Dollar went down, a lot of currencies expressed upward pressure.



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October 08 2020

Commentary by Eoin Treacy

The Road Ahead

Thanks to a subscriber for this report from KKR which may be of interest. Here is a section:

In fact, China is responding to these changes in corporate behavior using a variety of techniques, including becoming a larger and more powerful domestic economy that relies on its own production (what President Xi Jinping calls “domestic circulation”). In the current environment China may also better leverage its higher interest rate curve (both real and nominal) to try to attract capital to support this more permanent shift towards a consumption economy. A more stable currency outlook is also helping. Our bottom line: Expect a heightened rivalry across multiple facets of the relationship, including some decoupling. However, given the absolute size of the opportunity in China, now is actually the time to think through different ways to harness China’s growth in thoughtful, risk-adjusted fashion, particularly investments that reward long-term, patient capital. Specifically, we think that further implementation of domestic circulation as a policy will lead to the rise of more domestic corporate leaders, and as a result, more – not less – corporations will look to find ways to serve this emerging consumption base.

Eoin Treacy's view -

China’s golden week ends today and the market opens back up tomorrow. Over the last month there have been significant announcements about investments in infrastructure, boosting the consumer economy and championing the green energy movement. These points all likely to become actionable in the 4th quarter.



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