Does the new regime make China uninvestable?

Regulation uncertainty is now clouding the outlook on more than 40% of China's equity market

  

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DOES THE NEW REGIME MAKE CHINA UNINVESTABLE (1130 GMT)

The recent regulatory crackdown has led Columbia Threadneedle to exit all its Tencent positions but that doesn't mean it sees a wholesale withdrawal from China as justifiable.

Regulation uncertainty is now clouding the outlook on more than 40% of China's equity market, but China after all is the world's second biggest economy and growth opportunities remain, even as the economic regime evolves, Natasha Ebtahadj, portfolio manager at the U.S. asset manager points out.

BofA cut this morning its China GDP forecasts but still expects a very decent growth rates of 8.0%, 5.3% and 5.8% for 2021, 2022 and 2023 respectively. 

"Some of our portfolio companies, which are listed elsewhere, have significant exposure to China and we remain optimistic about their growth prospects, especially where revenues are aligned to new policy objectives," she says.

"Plans to decarbonise will be a likely boon for electric vehicle manufacturers. Similarly, the flip side of the ban on after-school tutoring has been the announcement of new policies to promote greater participation in sports," she notes.

Ebtahadj mentions TE Connectivity and Adidas, which derive respectively a fifth and a quarter of their sales from China, as stocks she holds that look set to benefit from these trends.

To conclude, she says: "More opportunities will present themselves with time, but we prefer to wait until the policy picture becomes clearer - we have not yet fully crossed the river".

(Danilo Masoni)

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GLITTERING CHINA (1104 GMT)

China's stuttering economic recovery, plans to redistribute wealth and default worries over Evergrande will make little to stop Chinese appetite for Cartier, Tiffany, Bulgari and Van Cleef, a survey found out. 

Morgan Stanley surveyed 1,527 people in July and August in China who purchased jewellery in the last 12 months to find out that women's empowerment, social media and a shifting in consumer preferences from gold to branded jewellery bode well for European luxury brands.

"One of the specificities of China vs other markets is that men used to account for a greater share of spending," MS says. Not anymore, as women's education rates rose "dramatically" and so is their purchasing power.

Before COVID, Chinese consumers accounted for 48% of the sales for Bulgari, 44% for Cartier, 40% for Van Cleef & Arpels and 25% for Tiffany, Morgan Stanley calculates.

Consulting firm McKinsey and Business of Fashion estimated that the branded luxury jewellery market in Asia is set to grow at 10%-14% CAGR in 2025 from the levels in 2019, with China being the main contributor of that growth, MS says.

"While the market has been jittery over regulatory uncertainty related to the "Common Prosperity" initiative by the Chinese government, we believe that the promotion of more equitable income distribution and a widening middle class population would be supportive for jewellery consumption," MS says.

MS reiterates overweight ratings on Bulgari and Tiffany's owner LVMH and Cartier and Van Cleef owner Richemont CFR.S .

(Joice Alves)

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WHY EVERGRANDE IS NOT CHINA’S LEHMAN (1020 GMT)

Is it or isn’t it a Lehman deja vu This is probably the most frequent question among investors when it comes to a possible Evergrande default.

Barclays has a pretty straightforward answer: we are “not even close.”

The current crisis will probably lead to “spill-over effects on China’s property sector, with economic implications.”

But the “conditions are not simply in place for even a large default” to be like Lehman during the global financial crisis.

According to Barclays, the Chinese real estate company has $300 billion of total liabilities, but “just a relatively small amount in financial securities”.

More than half of Evergrande's total liabilities comprises accounts payables and acceptance bills, another 14% ($42 billion) is wealth management products sold to retail investors, Barclays analysts say.

“But even if there are zero recoveries in this $42 billion, it is hard to see how it matters in aggregate, in a Chinese consumer sector that spent close to $6 trillion last year alone,” they add.

What about the risk of a domino effect as the company accounts for 4.2% of national home sales and 60% of its assets are housing inventory

“A sudden rush to monetize its assets at distressed levels seems unlikely and would not be permitted by the regulators, in our view,” Barclays analysts argue.

Default fears continued to stalk China Evergrande Group, as markets looked for possible intervention by Beijing to stem any domino effects across the global economy.

(Stefano Rebaudo)

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VIVENDI AND UNIVERSAL: CONGLOMERATE DISCOUNT IN ACTION! (0932 GMT)

20 years ago, Vivendi, a French fast transforming M&A hungry water-to-media conglomerate, bought Universal Studios from Canada's Seagram and became Vivendi Universal.

What was seen as a triumph of French capitalism - snatching a Hollywood major - soon became a symbol of the excesses of the dot.com bubble after its high-flying CEO Jean-Marie Messier was ousted and the group forced to fire sale a large chunk of its portfolio to avoid bankruptcy.

Today's listing of Universal Music in Amsterdam marks the epilogue of the music editor's history within Vivendi and if any lessons are drawn, the concept of 'conglomerate discount' will surely come to mind.

Universal Music Group is up a whopping 32% at 24.5 euros, boosting the value of the world's biggest music label to almost 47 billion euros in what was Europe's largest listing of the year.

Meanwhile, the former parent company Vivendi, has seen its share price drop to 11 euros from 31 euro on Monday.

Not bad actually when you consider that a Vivendi shareholder which had a 31 euros stock yesterday, now holds a 24.5 euros Universal share and a 11 euros stock in what remains of the conglomerate.

That's a profit of over 10 percent overnight which is quite far from a zero sum game and a neat illustration of a 'conglomerate discount' at work!

Truth be said, conglomerates have had a bad reputation for a while now even if they were seen as the driving forces of capitalism in the 70' and 80' when GE's former CEO Jack Welch was seen as the ultimate value creator.

It's now a consensual take that conglomerates, no matter how savvy the CEO is, do little in terms of adding value and that tracking Warren Buffet's investments or a listed private equity firm with a good track record is a safer strategy.

(Julien Ponthus)

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REBOUND TUESDAY (0742 GMT)

After Black Monday comes Rebound Tuesday. So here you go: the STOXX 600 is up 0.8% in early trading and most sectors are trading in the black after yesterday's widespread sell-off.

It does seem investors don't believe Beijing will let the Evergrande crisis spiral out of control to become China's Lehman moment and they have enough confidence to buy the dip.

Here's your snapshot:

(Danilo Masoni)

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LOSING THE PLOT (0707 GMT)

This week was supposed to be all about the so-called 'dot plot' and what kind of rate-rise projections U.S. Federal Reserve policymakers might make.

Came Monday morning though, default worries surrounding Chinese property firm Evergrande triggered a selling storm the likes of which had not been seen for a while. Alongside headlines generated by surging gas prices ahead of winter.

This may not be China's 'Lehman moment', as some have billed it, even if there was a sense of deep financial trouble on Monday, when Wall Street looked on course for its worst session since its March 2020 crash.

The turmoil came despite two extremely positive developments for equities: the relaxation of U.S. travel restrictions which saw airlines shares skyrocket and Pfizer saying data showed its COVID-19 vaccine was safe and protective in children.

So global markets have stabilised, with MSCI's index of Asia-Pacific shares outside Japan down only 0.2%, while European and U.S. futures are pointing higher.

Whether this reprieve lasts or proves fleeting will become evident soon -- the Fed concludes its meeting on Wednesday and Evergrande is due some bond interest payments on Thursday.

What investors would like to see from the Fed is some sign of a 'Powell Put', essentially that the central bank boss might intervene somehow to backstop markets. More realistically, few believe current market instability will change Fed thinking of when the economy might be ready for higher interest rates.

So focus might be on whether hotter-than expected inflation will cause the median of the Fed's forecasts for the interest rate liftoff to switch to 2022 from the current 2023.

(Julien Ponthus)

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THE FUTURES AIN'T WHAT THEY USED TO BE (0601 GMT)

European stock futures are trading in positive territory this morning, an impressive recovery given their were losing over 3% at one point on Monday when Wall Street's sell-off was at its worst.

While the situation regarding default worries at China's Evergrande hasn't materially changed, sentiment seems to have improved somehow.

Asian stocks didn't quite manage to shake off entirely contagion fears but MSCI's broadest index of Asia-Pacific shares outside Japan slid only 0.2% this morning.

Currency, commodity and bond markets steadied, but overall demand for riskier assets remain low especially as the Federal Reserve is expected to step closer to tapering on Wednesday.

Wall Street futures are also up between 0.3% and 0.5%.

(Julien Ponthus)

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