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Novum Alpha - Daily Analysis 23 July 2021 (10-Minute Read)

A fantastic Friday to you as stocks continue to inch forward, retracing slowly towards their all-time-highs.


In brief (TL:DR)

  • U.S. stocks edged higher on Thursday as investors continued to take in robust earnings reports and as it looks like the current resurgence of the coronavirus is contained in the least vaccinated states with the Dow Jones Industrial Average (+0.07%), the S&P 500 (+0.20%) and tech-centric Nasdaq Composite (+0.36%) all continuing to gain ground. 
  • Asian stocks were steady Friday after earnings optimism helped Wall Street edge toward an all-time high despite mixed economic data.
  • Benchmark U.S. 10-year Treasuries declined one basis point to 1.28% as investors continued to hedge risk amidst greater economic uncertainty from mixed data (yields fall when bond prices rise).
  • The dollar held a recent decline with investors rotating into risk. 
  • Oil held most of a three-day increase with Sep 2021 contracts for WTI Crude Oil (Nymex) (-0.29%) at US$71.70 amid expectations of tightening supplies as demand recovers.
  • Gold was stable with August 2021 contracts for Gold (Comex) (-0.08%) at US$1,807.70. 
  • Bitcoin (+2.01%) rose to US$32,652 with some investors betting on the dip and technical indicators suggest that an interim rally towards US$36,000 remains possible, inflows have also slowed against outflows but continue to lead (inflows suggest that investors are looking to sell Bitcoin in anticipation of lower prices). 

In today's issue...

  1. Europe Doesn’t Fear Inflation, It Fears a Lack of it
  2. Could Hong Kong Become Wall Street with Chinese characteristics?
  3. Are the Leagues of the Superrich Buying the Crypto Dip?

Market Overview

U.S. shares are surging ahead towards fresh records as bumper earnings stole the show from a mixed bag of economic data. 
Nonetheless, investors aren't entirely sold on risk, with longer-term U.S. Treasuries being snapped up with strong demand at auction seeing yields plummet. 
This week looks to see stocks clock a modest gain, and even Bitcoin rebounded from its dip below US$30,000 convincingly, suggesting that if investors are rattled, it's not showing up on the markets. 
In Asia, markets reflected Wall Street's bullishness with Sydney’s ASX 200 (+0.07%), Tokyo's Nikkei 225 (+0.58%) and Seoul's Kospi Index (+0.18%) all up, while Hong Kong's Hang Seng (-0.89%) was down in the morning trading session as Beijing continued to tighten the noose around its tech giants. 

Did you miss us at the Super Crypto Conference 2021? Watch it here...


1. Europe Doesn't Fear Inflation, It Fears a Lack of it

  • European Central Bank is taking a leaf out of the U.S. Federal Reserve's playbook to allow for higher inflation over target, as the "New Monetary Policy" of the Fed spreads across the Atlantic
  • Reflation trade in Europe looks attractive as stocks there, which are less tech heavy than their American counterparts, have not risen as high or as fast
Europe moves at its own pace and the idiosyncrasies of the continent can sometimes grind on people from more fast-paced parts of the world.
From siestas in Spain to the 35-hour work week in France, Europe has often danced to its own tune, but not come out the worst for wear from it.
But years of sluggish growth and muted inflation are leading policymakers at the European Central Bank to take a page out of the U.S. Federal Reserve’s playbook, to consider accepting higher levels of inflation in the interest of growth.
Following its latest policy-setting meeting on Thursday, the ECB, much like the Fed, has pledged to keep buying bonds and maintain its deeply negative interest rates in an attempt to shift the eurozone economy out of its persistent cycle of sluggish inflation and low growth. 
But just as it’s unfair to paint Europe with a broad brush, after all, not all Europeans take a nap in the afternoon or clock out after seven hours of work everyday, not all of the ECB’s policymakers are keen on the ECB’s new path.
ECB President Christine Lagarde however, echoing the sentiments of her American counterpart, Fed Chairman Jerome Powell noted after the ECB’s policy meeting that it was “totally premature” to even discuss tapering asset purchases.
Much like the U.S., ambitious vaccination programs have helped to turn the tide on the pandemic in many parts of Europe, facilitating a broad reopening and contributing to strong economic recovery.
Inflation across the eurozone hit 1.9% in June, but many remain skeptical that it will exceed the ECB’s target.
And that provides opportunities for investors, especially as the U.S. equity markets get increasingly expensive and European stocks lag their American counterparts, because of their heavier dependence on re-opening.
Whilst the reflation trade in the U.S. appears to have lost some steam – the trade in more economically-sensitive stocks such as industrials, financials and materials – Europe, which has seen stocks rise but not as quickly as in the U.S., may be a prime candidate for a European version of the reflation trade.
Stocks of European banks, industrials, particularly automotive and electronics, as well as consumer stocks look set to do particularly well.
And with accommodative policy from the ECB, should tee up nicely for a run at the reflation trade, albeit with a European flavor.

Did you miss us at the Super Crypto Conference 2021? Watch it here...


2. Could Hong Kong Become Wall Street with Chinese characteristics?

  • Chinese listings in Hong Kong are not expected to have done as well had they listed on Wall Street 
  • Investors may double down on the existing Chinese tech firms that still remain available in New York 
The Chinese Communist Party has long touted the ideology of “socialism with Chinese characteristics” to help explain the portrait of contradictions that the world’s second largest economy is often seen to embody.
On the one hand, China’s markets are fiercely competitive and, in many cases, (as evidenced by the innumerous corporate scandals) take capitalism to its logical conclusion.
But in many other ways, from its myriad state-owned businesses to its healthcare system, China also embodies many of the ideals of socialism that even Vladimir Lenin could not have imagined were possible.
So when Beijing cracked down on its recalcitrant ride-hailing app Didi Global (-11.30%), which went ahead to list on Wall Street against the advice of regulators, analysts were taken by surprise by the extent and intent behind the punitive measures to take Didi off China’s app stores, essentially depriving it of the oxygen it needs to survive.
And as China has moved progressively to limit its many firms that were considering in following the footsteps of Alibaba (+0.096%) and Tencent (-0.28%), and listing on Wall Street, global investment bankers have had to redirect their Chinese clients to look closer to home for a listing instead – Hong Kong.
But in Hong Kong, these same Chinese companies may find that they too have to deal with the same set of contradictions that is China.
While ostensibly run along the same lines left behind by the British – a common law system and the rule of law, ever since China’s President Xi Jinping too office, the noose around Hong Kong has gradually been tightened.  
According to data from Dealogic, around 20 Chinese companies have publicly disclosed plans to raise some US$1.4 billion on Wall Street, but now many of these same firms might be weighing their options elsewhere, after Didi shares shed more than a fifth of their value since listing.
And while many of these prospective listings are now looking at Hong Kong instead, they may find that a less welcoming market.
For starters, strict listing rules in Hong Kong have minimum profitability requirements, and Chinese companies might struggle to sell shares in the territory.
Hong Kong is also in the wrong time zone for many of the biggest investors of shares of Chinese firms on Wall Street, being between 6 and 8 hours ahead of Europe’s financial capitals of London and Frankfurt, and some 12 hours ahead of New York.
And while Hong Kong may appear to offer a good alternative to Chinese firms that would otherwise have listed in the U.S., as Beijing’s control over the territory makes it seem as a less risky jurisdiction to raise capital, the idiosyncrasies of the former British colony’s market could overshadow the very raison d'etre of a listing exercise.
Hong Kong’s stock exchange is less deep, far less liquid than Wall Street, and companies looking to list there need to be vetted both by the city’s regulators (essentially Beijing) as well as the stock exchange.
And unlike Wall Street, where Chinese firms, although numerous, have a certain novelty and exclusiveness to them, Chinese listings in Hong Kong make up some 80% of the equity on the Hong Kong Exchange.
In other words, a Chinese firm, tech or otherwise, listing on Hong Kong, would be “just another Chinese listing,” and the reason why so many Chinese entrepreneurs would much rather ring the bell at the New York Stock Exchange or Nasdaq.
For many Chinese firms which urgently need to list their shares on some exchange, they could do worse than Hong Kong, but for investors expecting shares of these Chinese IPOs to pop in Hong Kong as they typically do on Wall Street, they can do worse by buying them.

3. Are the Leagues of the Superrich Buying the Crypto Dip?

  • Survey of family offices by Goldman Sachs reveals that as much as 60% are either buying cryptocurrencies or have already done so
  • Cryptocurrencies are viewed by family offices as transformative technology, akin to the internet in the early days 
Inside a safe in one of Singapore’s over two hundred family offices, lies a stack of USB sticks.
“They’re Ledgers, the latest one,” says the family office manager proudly, “based on today’s price, there’s at least US$20 million worth of Bitcoin in those ten sticks and we’ve got a few dozen more at the freeport (in Changi).”
Seated in the airconditioned comfort of a well-appointed but otherwise nondescript-looking shophouse in Singapore’s Tanjong Pagar area, family offices from Singapore to Switzerland have developed a taste for the decentralized.
According to a recent survey by Goldman Sachs (-0.21%), firms that manage wealth and personal affairs for the rich are increasingly looking to make bets on cryptocurrencies, with nearly half of the family offices that it does business with looking to add the nascent asset class to their stable of investments.
Goldman Sachs reveals that its recent survey of family offices globally showed that as many as 15% of 150 family offices are already invested in cryptocurrencies, with another 45% interested to enter the space as a hedge for higher inflation, prolonged low interest rates and macroeconomic shifts following a year of unprecedented global monetary and fiscal stimulus.
Family offices and the ranks of the privately wealthy represent significant assets under management, with some estimates putting the figure as high as US$10 trillion, making them a significant force across multiple markets and asset classes.
And given that cryptocurrencies have only represented some US$2.6 trillion in (highly speculative) market cap on a good day, even a small allocation by family offices into digital assets can have significant repercussions.
Family offices have long been investors in private equity (stuff like leveraged buy outs etc.) and real estate, but have also been one of the biggest drivers of the speculative boom in special purpose acquisition companies or SPACs.
Given that family offices don’t take outside money, they are infamously opaque and relatively immune from regulatory oversight, with sometimes dire consequences.
Earlier this year, the implosion of Bill Hwang’s Archegos Capital Management, a family office with some US$10 billion in leverage, saddled some of the biggest names in banking with billions of dollars in losses.
Many family offices surveyed by Goldman Sachs are of the view that blockchain and cryptocurrencies will be transformative technologies, likening the technology to the internet of the early days, and are keen to get in early.

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Jul 23, 2021

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