On my paid site–China weakens the yuan, Japan looks to stimulus, why bargain hunting is so hard on this dip, and my take on bank stocks
On my paid site JubakAM.com I aim for a mix of posts on macro trends and on individual stock picks. It’s a strategy I call tactical stock picking.
Over the last few days on this free site and on my paid site, I’ve posted my views on the short-term and medium-term effects of the Brexit vote.
In addition to those posts on my paid site I’ve tried to remember that not everything is about the U.K. and European markets and economy.
For example, today the People’s Bank of China lowered the dollar/yuan reference rate. The last two times the People’s Bank did this–in January and last August–it contributed to an emerging markets sell off. The fears in those markets were that a strong dollar and increasing competition from lower priced Chinese goods would make it tougher for companies from Brazil to India to sell their goods.
Today’s rally, June 28, looks to be based on hope that global central banks will start new stimulus packages. First one up I note in a post today on JubakAM.com, looks to be Japan where the government has proposed new stimulus to weaken a yen that has soared on the flight for safe havens after Brexit.
I’ve also posted, twice, on why the Brexit crisis is so tough on bargain hunters. The first, more general piece, looks at how this is likely to be a very extended crisis–which means that the markets will have time to vacillate between hope and fear a number of times over the next two years. The second, a more specific piece, applies this logic to the banking sector. The tough thing about finding bargain investments among bank stocks is that the sector is undergoing so much change that its hard to know what stocks are selling off because they should and what stocks are bargains because this crisis hasn’t changed favorable fundamentals. I end with a list of stocks to watch as trends in the banking sector develop.
That’s what I’m working on at my subscription JubakAM.com site. (I’m still, yes still, at work on what’s turned out to be a very complicated post on the robotics sector and on one about water stocks that should go up on JubakAM.com in the next day or two. Before those get posted, though, I be putting up a post 0n Brett bargain hunting in the technology sector and the timing of any search for bargains..) I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway.
Of course, there’s an ulterior motive to sharing this with you: If you decide that you’d like more of my thoughts on the market in my JubakAM.com posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)
Wait until next year. Again.
Morgan Stanley Capital International, the keeper of the MSCI Emerging Markets index, yesterday decided that it wasn’t time yet to include China’s Shanghai and Shenzhen markets in the stock index. (The Hong Kong market is already included in the index.)
This marks a third “No” from Morgan Stanley’s index keepers.
The MSCI Emerging Markets index is tracked by investors with $1.5 trillion in assets. Including Shanghai and Shenzhen in the index would have meant rebalancing all that cash to give weight to Shanghai and Shenzhen stocks. The influx of cash would have come at a good time for stock prices in those two markets. The Shanghai Composite index, for example, is down 18.4% for 2016 as of June 15 and down 42.03% for the last 12 months.
The Chinese government has spent much of this year responding to the issues raised in the 2015 decision to deny index membership to China’s mainland markets. The government has added curbs intended to limit the ability of companies to halt trading in their shares, for example, and has loosened restrictions on cross-border currency movement.
But the government’s very heavy handed response to a steep decline in stock prices in 2015 actually moved China’s markets backwards in some areas. To help end the downward spiral Chinese market regulators issued bans that prevented big shareholders from selling, for example, launched investigations of financial and economic analysts, and detained some investors who had bet on falling stock prices. International investors also remain worried about restrictions, such as the 20% monthly limit on repatriating cash, that make it difficult to move money out of these markets.
Ahead of the call, overseas investors were divided in their forecasts on the decision with 10 of 23 strategists surveyed by Bloomberg in May predicting approval by Morgan Stanley, five seeing a rejection, and eight saying it was too close to call.
Chinese markets were equally uncertain. Yesterday the Shanghai index started off by dropping 1.1% before finishing the day up 1.6%. However, traders weren’t certain whether those moves were a result of genuine market sentiment or the typical end of the day buying by Chinese regulators.
The rejection and the reasons for it create an interesting puzzle for Chinese regulators. Should China pull back on market interventions–risking an even deeper bear market in Shanghai and Shenzhen–or should the government continue to support stocks and risk a fourth consecutive rejection by Morgan Stanley Capital International next year? My opinion is that Chinese regulators will try, as per usual, to have it both ways by intervening to support stocks now with the hope that they will be able to step back in 2017 and show the keepers of the index the progress that they are looking for.
For investors in China, I think the most likely scenario is intervention as usual for the next six months or so.
By Wednesday we will know if China’s stock markets have been added to the MSCI Emerging Markets index. A “yes” decision by Morgan Stanley Capital International, the keeper of the index, would move billions of dollars that track the index into the purchase of Shanghai and Shenzhen shares. That would be a huge boost for mainland markets that have been stuck in a depressed and narrow trading range for all of 2016. The Shanghai Composite Index, for example, is down 19.95% for 2016 to date and down 44.25% for the last twelve-months.
I don’t expect any trader or speculator in China’s mainland stock markets to give up on the Shanghai or Shenzhen markets until we hear from Morgan Stanley in the next couple of days. The “right” decision could have an explosive effect on Chinese stocks. (So could the “wrong decision,” of course,with the explosion pointed in the downward direction.) It remains an open question whether Morgan Stanley will decide that China’s markets meet its guidelines for openness and liquidity.
This near term event has completely overshadowed some truly negative news out of China today and last week.
Today official Chinese government figures show that private sector investment is, well, I’d call it anemic except that would be unfair to anemia. Industrial production did indeed grow by 6% year over year in May, matching estimates from economists surveyed by Bloomberg. And retail sales were up 10%.
But the figures on fixed-asset investment–that’s money going into housing, factories, highways, airports and the like–were horrific. Fixed-asset investment rose by 9.6% in the first five months of 2016 That was the slowest rate of growth since 2000 and below the estimates of all 38 economists surveyed by Bloomberg.
Scratch the surface a little, though, and the report on fixed asset investment was even worse. Almost all the growth in this important category, which tells us a lot about how Chinese companies think the economy is likely to do in the near future, came from the government. Fixed-asset investment from the private sector slowed to 3.9% growth for the first five months of 2016. It’s only government spending that is keeping the figures for fixed-asset investment from signaling a shocking drop in China’s economic growth rate in the not so distant future.
The slowdown in private-sector fixed asset growth is certainly connected to the slowdown in China’s property sector. Property investment growth came in at 7% for the first five months of the year. But the drop in private sector fixed investment growth was even steeper than that and was fed by a collapse in investment by companies in the coal, and iron and steel sectors of the economy.
Ok, that was today’s news that the market chose to ignore.
Last Friday the market decided to look past an emphatic warning from the International Monetary Fund.
In a speech in China David Lipton, the No. 2 at the IMF, called on China to “immediately” address the huge level of debt run up by its corporate sector. China’s corporate debt now equals 145% of GDP (and China’s total debt now stands at 225% of GDP, according to the IMF.) Of that, the IMF estimates about $1.3 trillion is in loans to companies without enough income to pay the interest on their loans. The solution proposed by the Chinese government–debt for equity swaps–could sell make the situation worse, the IMF said in an April report, by enabling zombie companies to stay in business and thus delaying needed market reforms.
Before you throw yourself or your portfolio under a train, however, note that many analysts think China’s huge debt load is unlikely to set off a replay of the Global Financial Crisis. That’s because the borrowing is largely through banks and as such the central bank has the power to intervene very quickly. At least that’s the take on the situation from the Hong Kong office of Macquarie Capital in a report issued on June 8.
The weeklong Lunar New Year holiday starts in China on February 8. This isn’t do or die for Macao casinos but it would sure be nice to see traffic to the Macao properties of Las Vegas Sands (LVS), Wynn Resorts (WYNN) and most especially MGM Resorts International (MGM), since I own those shares in my Jubak Picks portfolio, pick up during this holiday. What I’d particularly like to see is a pick up in VIP and other big stakes gambling because that would indicate that wealthier Chinese have decided that going to Macao isn’t going to put them on the radar screens of Chinese anti-corruption investigators. A high roller trip to Macao has been a black mark almost as large as the purchase of a Rolex or anything from Louis Vuitton.
We won’t know the details on the make up of traffic to Macao until the holiday is over but pre-holiday traffic has been up over last year. Total visitors to Macao climbed 5% from the pre-holiday week in 2015 and the number of visitors to Macao from mainland China was ahead by 11% from the pre-holiday week in 2015.
We’re looking ahead to the Year of the Monkey so we should be prepared for tricks (and for being pelted with rotten fruit.) A Year of the Monkey can come in one of five varieties. 2016 is a Year of the Fire Monkey who is ambitious and adventurous, but also irritable.
China’s central bank moved to stabilize the country’s stock markets after stocks fell 7% in Shanghai yesterday and triggered a market shutdown. Today the Shanghai Composite Index fell 0.26% and the Shenzhen index was lower by 1.86%.
What’s funny–in an “Oh No” instead of a “Ha, Ha” kind of way–is that the strong intervention by the People’s Bank didn’t actually produce a rally to recoup any of yesterday’s losses. It looks like Chinese investors have decided that troubles in China’s financial markets and economy aren’t susceptible to a quick fix.
The People’s Bank injected 130 billion yuan ($19.9 billion) into the financial system on Tuesday, the most since September. That was enough to take the overnight repurchase rate, a measure of the availability of funds to banks, down one basis point to 2.01% in Shanghai. That rate had climbed to 2.12% on December 31, the highestl since last April. Government regulators also said that they are rethinking lifting the ban on sales by big shareholders who own more than 5% of a company’s shares. That ban, imposed to help stabilize the market in last summer’s sell off, was set to expire on Friday, January 8. The expected expiration of that ban is thought to have contributed to yesterday’s sell off.
In addition, acting through China’s commercial banks, the People’s Bank moved to support the yuan. The onshore yuan, yuan that trade inside Mainland China, rose 0.18% Tuesday after dropping 0.62% on Monday. The People’s Bank is looking to stem rising cash outflows from China on worries about a falling yuan and a slowing Chinese economy, Bloomberg estimates that $367 billion left the country in the three months that ended in November.
Tuesday’s moves won’t stem the outflow of yuan or fix a slowing economic growth rate in China. And intervening to support China’s stock markets won’t help reduce the huge price gap between Shanghai and Shenzhen and the world’s other major stock markets. The median price to earnings ratio in Shanghai is near 65, Bloomberg calculates. India, the world’s next most expensive major market trades near 25. The U.S, U.K., and German markets all trade with median price to earnings ratios of 20 or less. Shares of Chinese companies that are listed in both Shanghai and Hong Kong sell for 38% higher prices in Shanghai–which has more to do with the dominance of optimistic individual investors (80% of trading) in Shanghai and the relative lack of international investors in those markets than it does with any fundamental strength in Shanghai versus Hong Kong.
With China’s growth rate slowing and the yuan in a downtrend, there’s no way for Shanghai and Shenzhen to sustain the current level of premium pricing. The People’s Bank can intervene to prevent panic selling but the only way to actually end that PE gap is for Mainland Chinese stocks to fall further until the economy can find its feet and growth can stabilize. That return to rising growth isn’t projected by economists to happen in 2016 or 2017.