A wonderful weekend to you as U.S. equities rebound from the carnage of the week and Asia looks set to reopen better next week so investors should enjoy the respite.
In brief (TL:DR)
- U.S. stocks found their footing on Friday, with the Dow Jones Industrial Average (+0.65), the S&P 500 (+0.81%) and tech-centric Nasdaq Composite (+1.19%) all rebounding as investors bought the dip, especially in tech stocks and providing some reprieve from the carnage.
- Asian stocks closed down on Friday as Chinese stock continued to get hammered and Hong Kong's Hang Seng Index has entered technical correction territory.
- Benchmark U.S. 10-year Treasury yields rose to 1.261% as U.S. equities recovered (yields rise when bond prices fall).
- The dollar continued to gain ground.
- Oil continued to slide with October 2021 contracts for WTI Crude Oil (Nymex) (-2.15%) at US$62.32 as domestic U.S. consumer demand shows signs of weakening.
- Gold was flat with December 2021 contracts for Gold (Comex) (+0.05%) at US$1,784.00 as inflation fears continue to decrease.
- Bitcoin (+4.94%) surged to US$49,000 heading into the weekend with signs that it may push as high as US$50,000 over the weekend as outflows raced against inflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices).
In today's issue...
- Is the Puzzle Box of Chinese Stocks Worth Opening?
- The Picks & Shovels Trade for Gold Loses its Luster
- Singapore Grapples with Hong Kong for Asia's Cryptocurrency Crown
As one pandemic week rolls into the next, it can sometimes feel like Groundhog Day, with markets trapped in an endless feedback loop.
Almost like clockwork, mid-month, U.S. stocks crater, investors buy the dip and the rest of the month signals recovery.
And just before options expired, as expected, U.S. stocks fell last week and hedgers were prepared and did buy the dip on Friday.
But the sheer force of the selloff midweek was enough to give food for thought, because qualitatively there are genuine concerns that all is not well with the global economic recovery story.
A surging delta variant of the coronavirus is threatening to derail early gains made and there are signs that U.S. consumer demand is flagging at a time when China's economic recovery is starting to flatten.
Against this backdrop, Beijing is bludgeoning some of its most profitable sectors with the goal of achieving socialism with Chinese characteristics, regardless of how much it hurts investors.
It's no surprise then that Asia stocks were hammered headed into the weekend, with Tokyo's Nikkei 225 (-0.98%), Hong Kong's Hang Seng (-1.84%), Seoul's Kospi Index (-1.20%) and Sydney’s ASX 200 (-0.05%) all lower on Friday's close.
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1. Is the Puzzle Box of Chinese Stocks Worth Opening?
- Investors in Chinese stocks may want to reassess their time horizons and the opportunity cost of keeping cash locked up in Chinese equities which could continue to come under pressure
- Socialism with Chinese characteristics could prove to be a long and expensive experiment for investors staying with Chinese stocks
The thing about non-democratic governments is their propensity to be flaky, often on instituting policy U-turns at the drop of a hat, with disastrous consequences for investors and markets.
Take China for instance.
Although it’s the world’s second largest economy, the power of Beijing’s central management means that policy shifts aren’t subject to the checks and balances that investors in the U.S. may be accustomed to, with investors having to adapt with almost zero notice.
Which helps to explain why a continued selloff in Chinese equities is intensifying against the face of a regulatory crackdown that has seen even typically “diamond hand” investors like Cathie Wood, suddenly turn to “paper.”
Wood warned last week that the Chinese stock market was likely “to stay down for a long time.”
But a small chorus of investors, including emerging market veterans like Mark Mobius, are sticking with Chinese equities.
Speaking with Bloomberg, Gabriela Santos, global market strategist at JPMorgan Chase’s (+0.29%) asset management was also sanguine on China's prospects,
“It’s absolutely business as usual for investing in Chinese equities. The trick is not to see each thing that China says or does as an independent development. It’s all a piece of a bigger puzzle.”
But like a Chinese puzzle box, the bigger question investors need to ask is whether the puzzle is even worth solving?
Time is money and the longer investors have their assets tied up in Chinese stocks, the greater the opportunity cost and the higher the propensity to fall into the sunk-cost fallacy,
Investors need only look to Japan’s lost decade from 1991 to 2001, which saw a dramatic slowdown in the country’s economy, at a time when there were some
who were predicting that Japan would overtake the U.S. in economic might by the turn of the century.
During that time, Japan’s loose credit conditions fueled an asset bubble that eventually collapsed as interest rates rose at a time when a credit crunch was unfolding, a period which the country is still arguably recovering from till this day.
Could China be the same?
Unlike Japan, China has numerous capital controls and a vice-like hold over its economy, but contrary to the popular narrative that the U.S. owes China lots of money, China’s overall indebtedness by the end of 2020, was a whopping 270.1% of GDP.
In comparison, U.S. debt to GDP was just 129.1% at the end of the same period.
Like Japan in the 90s, China is going through a transition from a middle to a high income country over the next decade, and like Japan, it’s a debt-fueled shift, one that could be painful, not just for China itself, but for investors as well.
Which begs the bigger question, can investors afford to miss the takings from that transition?
Or are they backing an investment thesis (centrally developed in the Great Hall of the People no less) that may ultimately turn out to be costly?
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2. The Picks & Shovels Trade for Gold Loses its Luster
Shares of gold miners sink even as broader market rises
Although the "picks and shovels" trade exposes investors to less volatility compared to the underlying asset, it can also be costly if demand for the underlying asset wanes
Call it one of legendary investor Warren Buffett’s shortest love affairs with a stock if you will.
For the famed value investor who often reiterates that the holding period for a stock should be “forever” his brief few quarters with Canadian miner Barrick Gold (+0.52%) that ended early this year can appear at odds with that investment thesis, but in line with his overarching philosophy – be fearful when others are greedy.
As inflation fears grew earlier in this year, and a surge of demand for gold as a hedge saw investors rotating into the “picks and shovels” trade, snapping up stocks of gold miners, Buffett sold shares of Barrick Gold into a rising market.
That move now appears somewhat prescient as the shares of big, U.S.-listed gold miners have shed almost one-fifth of their market value this year alone, as a strengthening dollar and a rise in bond yields dented the price of bullion.
While the MSCI All-World index put on 11% since the end of last year, the New York Stock Exchange Gold Bugs index fell by 20% over the same period, with gold still well down from its record of US$2,000 last August.
Unlike bonds, gold offers no yield and “just sits there and looks at you,” according to Buffett, dulling its appeal against the global rally in equities and rising yields.
And that slide in gold prices has hit investor sentiment towards miners, despite rising dividends from the industry and pledges to reduce its impact on the environment.
While the number of share buybacks among gold miners this year has been unprecedented, suggesting that miners may see their shares as undervalued, this hasn’t stopped shares of their companies from plummeting precipitously, even as the broader market has rallied.
And although the picks and shovels trade may make sense from a risk management perspective, that’s only if the underlying asset itself is in demand.
The resilience of the dollar, which makes gold more expensive for overseas buyers, rising bond yields against a backdrop of prospective rate hikes, are all conspiring to undermine the bullish case for gold and by extension, its miners.
Earlier this year, economists from Citigroup (+0.59%) and Goldman Sachs (+0.58%) had both predicted that gold could hit as high as US$2,300 this year, against a backdrop of inflation, but now that inflation concerns have waned and there are signs the global economic recovery may not be as robust as hoped for, the investment case for the precious metal is starting to come under pressure.
3. Singapore Grapples with Hong Kong for Asia's Cryptocurrency Crown
Visitors to both Hong Kong and Singapore can often be taken aback by the similarities between these two rival cities.
With bustling harbors and gleaming skylines, Hong Kong and Singapore, both former British colonies, stand as shining beacons to capitalism, but their rivalry is not far from the surface.
Hong Kong has played a pivotal role in the short history of cryptocurrencies, being the birthplace of some of the world’s biggest cryptocurrency firms and the industry’s most pioneering inventions.
Tether, the world’s favorite dollar-backed stablecoin was launched in the Chinese territory, while FTX Trading (for full disclosure, Novum Alpha trades on FTX), a cryptocurrency exchange valued recently at US$18 billion calls the fragrant harbor home.
A potent mix of financial expertise and entrepreneurial spirit has seen the rise of Hong Kong as a key port of call for the cryptocurrency industry, with some of the worlds largest exchanges started by those who had left high-flying careers at the many international banks with Asian headquarters there.
Chinese money, often in pursuit of ever-new options to facilitate capital flight from the Middle Kingdom, poured into Hong Kong’s burgeoning cryptocurrency industry, providing both a ready source of investment and significant over-the-counter or OTC flows for cryptocurrency trades.
However, that proximity to China, once seen as a boon for the cryptocurrency sector in Hong Kong, may now become a burden, as Beijing flexes its muscles in the territory and made it patently clear it has no tolerance for a challenge to its own sovereign currency the renminbi.
An ongoing crackdown by China of its own cryptocurrency industry, is forcing some soul searching among Hong Kong’s cryptocurrency companies.
Although Hong Kong outlined a framework to regulate cryptocurrencies as far back as 2018, that framework, as well as further licensing requirements for exchanges rolled out last year, have yet to become law.
New proposals would toughen Hong Kong’s stance against cryptocurrencies, potentially stamping out the entrepreneurial zeal that has buoyed the industry and risking the city being unseated from its cryptocurrency pedestal by its rival down south, Singapore.
Under proposed new rules in Hong Kong, cryptocurrency trading would be curtailed to so-called professional investors, those with US$1 million of liquid assets, excluding cryptocurrencies and exchanges would need to be licensed the same way as existing asset management companies deal in securities.
The new rules, if adopted, would significantly raise the compliance costs of cryptocurrency companies headquartered in Hong Kong, at a time when Singapore is opening the doors for cryptocurrency firms.
Two weekends ago, Singapore issued a slew of in-principle licenses to digital asset companies, under its shiny new Payment Services Act, which covers digital asset and cryptocurrency firms, as the city markets itself as a viable alternative for international cryptocurrency firms to access Asian markets.
Some of the biggest names in cryptocurrency already call Singapore home, from Binance’s founder Changpeng Zhao to Ethereum co-founder Vitalik Buterin
Cameron and Tyler Winklevoss have set up the Asian base for their Gemini exchange in Singapore and even OSL, a large Hong Kong-based cryptocurrency group is rapidly expanding operations in the city-state.
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