Novum Digital Asset Alpha - Daily Analysis 17 August 2020
The start of a new week! And as the weather cools in the northern hemisphere, investors are also cooling to increasingly expensive stocks.
In brief (TL:DR)
In today's issue...
They say imitation is the greatest form of flattery and from that perspective, the Chinese central bank has been aping the U.S. Federal Reserve, with cash injections flowing into the Chinese economy as evidence of slowing recovery in China's economy starts to worry the apparatchiks in Beijing.
Asian stocks reflected uncertainty, trading mixed in the morning session with Tokyo's Nikkei 225 (-0.63%), Sydney’s ASX 200 (-0.60%), Seoul’s KOSPI (-1.23%) down, while Hong Kong’s Hang Seng Index (+1.26%) was up strongly in contrast, on the back of Chinese central bank injections of liquidity.
For now at least, the Trump administration is targeting individual Chinese companies as opposed to the entire Chinese nation, which should provide investors a huge sigh of relief, with a planned review of the U.S.-China trade deal postponed, but rhetoric against Chinese tech companies escalating.
And while friction between the White House and China is likely to persist, for now at least, the Trump administration is trading barbs with individual companies, which are far softer targets than Beijing itself.
Meanwhile, investors are continuing to bet that central banks and governments will support ailing economies trying to rebound from coronavirus shutdowns, with low interest rates and fiscal policy measures that have seen a nearly 50% recovery in global stocks since March.
1. America Is Overexposed to the Coronavirus, Could Your Investments Be Too?
Chinese tech companies want nothing else than to be on it, and global investors can't get enough of it.
With the world's deepest, most liquid and vibrant capital markets, it's no surprise that exposure to American stocks are still top of the list for most investors.
And it's difficult not to see why.
Comparing the S&P 500 against the MSCI All Countries Index (excluding the U.S.), U.S. stocks have consistently outperformed the rest of the world over the past decade.
Shares in American companies grew by 186%, compared with just 50% for the rest of the world in 2019 alone.
But given the spectacular fall and rise in U.S. stocks due to the coronavirus pandemic, risks are accumulating in an American-heavy portfolio as compared to one that is more geographically diversified.
A weaker dollar and a feeble coronavirus response in the U.S. has seen the economies of South Korea, China and Japan catch up in terms of potential and attractiveness.
A weaker dollar makes overseas markets more attractive in dollar terms and while the IMF forecasts that U.S. GDP will contract 8% this year, emerging markets are only expected to shrink by 3%.
And while the IMF estimates that the U.S. will rebound by 4.5% next year, the emerging market average is 5.9%.
The nations of Asia and Europe had the earliest outbreaks of the coronavirus, but they also took the swiftest and strictest responses to the pandemic.
And while some might rail against the Asian and European response as being draconian, including enforcing isolation and fining violators, few would argue with its results.
While Americans continue to debate what ought to be a simple health and safety issue (wear a mask already) as a matter of freedom, in Asia and Europe, the pandemic's spread has been far more controllable because citizens there recognize that wearing a mask isn't a matter of ideology, it's question of idiocy.
Given the sky high valuations of some American stocks right now, portfolio management strategies which are overexposed to U.S. equities may want to consider realizing a portion of their gains to diversify across other more reasonably priced geographies.
2. Made In China, Listed in America - Should Investors Beware Chinese Stocks?
Like Thanos from Marvel's The Avengers, U.S. President Donald Trump can make billions of dollars in market capitalization disappear with his thumbs.
A random tweet and a stock's capitalization can evaporate almost instantly.
And that has been a problem, especially for Chinese stocks listed on American exchanges.
With elections in the U.S. now just months away, Trump is rattling his saber to distract a population mired by economic woes and a coronavirus pandemic that shows no signs of letting up.
With TikTok and Tencent's (-0.69%) WeChat under fire, Trump has now aimed his sights at other Chinese tech companies, including e-commerce giant Alibaba (+0.10%).
To make matters worse, Alibaba was suggested as a potential target not by the Trump administration, but by a reporter asking that question, to which Trump responded at the press briefing,
"We're looking at other things, yes we are."
The American markets haven't opened yet at the time of writing, but considering that Tencent saw US$66 billion of its market cap go poof in the 2 days after the Trump administration announced a ban on WeChat, it'd be interesting to see what happens to Alibaba next.
To understand Trump's Thanos-like powers on market capitalization is to go down the rabbit hole of the President's psyche.
With polls showing that most Americans disapprove of Trump's handling of the coronavirus pandemic, Trump has fallen back on his tried and tested defense plan - blame it on someone else.
Instead of taking responsibility for his administration's botched pandemic response, Trump has continued to pander to his base by characterizing the coronavirus as a Chinese construct and stirring up conspiracy theories as to the pandemic's source, ahead of the U.S. presidential election.
It doesn't help that TikTok was discovered to have been spying on iPhone users using a method that had been banned by Apple (-0.09%), which Trump has latched on to, and used as a pretext to target Chinese companies in general.
On Friday, the Trump administration ended a waiver that allowed some U.S. companies to continue selling goods to Huawei, the Chinese telecoms equipment giant that Washington believes is spying for Beijing.
One beneficiary of those waivers had been Google (-0.71%), which up till Friday, had been quietly updating its Android operating system for older Huawei phones.
For all the fire and fury, Trump is treading a fine line, Chinese stocks listed on American exchanges bring millions across in fees and trading activity and he will be careful not to spark another trade war which could be economically damaging to American exporters.
Far easier instead to target individual companies without full confrontation with Beijing.
Yet given that Chinese companies do not rely primarily on American markets for their revenues, Trump's moves may be damaging to their stock prices in the short term, yet provide plenty of buying opportunities to investors looking at the longer term potential of these firms.
3. Is the Wild West Of Cryptocurrency Civilizing?
The pages of a lawsuit against BitMEX read a lot like a financial crimes novel, with allegations from racketeering to money laundering making for a steamy read (if you're into that sort of thing).
But the world's oldest and most controversial cryptocurrency derivatives exchange may be going straight as it announced mandatory identity verification for all its users by the end of this month.
Cryptocurrency derivatives have long been the tail that wags the dog, with derivative exchanges like BitMEX often decried as having an outsize influence on the price of the underlying cryptocurrencies which its derivatives are purported to track.
By the end of this month though, verification will be mandatory for all users of BitMEX, a process that will include proof of location, funds, trading experience and more.
And that could spell trouble for U.S.-domiciled BitMEX traders, which according to court documents, account for at least 15% of BitMEX's trading volume.
The policy change at BitMEX comes at a time when more institutional players are entering the cryptocurrency market and regulators are providing the framework for their entry.
BitMEX has provided its users a grace period of 6 months to comply with the policy shift, but could see large numbers of derivative traders leave the platform in the shorter term.
Easy registration, high leverage and importantly, Bitcoin-only balances, have helped BitMEX bootstrap liquidity from all sources and built its reputation as the destination trading platform for all manner of cryptocurrency trader, from the profligate gambler to the (alleged) money launderer.
With over US$1 billion in open interest (unsettled contracts) in cryptocurrency derivatives on BitMEX, it remains one of the world's top cryptocurrency derivative exchanges and the move to greater self-regulation could be strategic for the platform's longer term prospects.
Although the Seychelles-domiciled exchange has little incentive to self-regulate, an increasingly sophisticated trader base, will eventually demand better controls, transparency and protection.
And a move by BitMEX to adopt regulatory best policies may also put pressure on other cryptocurrency exchanges to follow suit, which will benefit the industry as a whole.
Bitcoin and Ethereum have been on a tear this year, and as new participants enter the cryptocurrency space, the old Wild West days where service providers played fast and loose with KYC (know your customer) and AML (anti money laundering) requirements may be behind us.
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Aug 17, 2020
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