On Target Newsletter

In this issue:

  • China’s future 
  • Chinese credit markets 
  • Greece 
  • Indonesia 
  • Investment advice 
  • Pandemic winners and losers 
  • World economy 
  • Copper

China’s Spectacular Plans for the Future

China’s has had extraordinary growth over the past 40 years since Deng Xiaoping relaxed the Communist Party’s authoritarian grip and unleashed an explosion of free-enterprise activity. That has made China the world’s second largest economy – indeed, already the biggest of all in purchasing-power terms. Over the past 40 years annual output per person has soared from 3 to 27 per cent of America’s.

Signature of the world’s biggest free trade deal, linking 15 Asia-Pacific nations in the Regional Comprehensive Economic Partnership, a new bloc encompassing a third of the world’s economy and population, has been described as “a huge victory for China” over the US in Asia.

Where do things go from here for the Middle Kingdom?

At a secret meeting in Beijing a few weeks ago, the nation’s decisionmakers designed plans to “prepare for war” in a more dangerous world by raising its armed forces to parity with those of America’s within seven years, and achieving self-sufficiency in core technologies, energy supply and food production, while doubling the size of the economy by 2035.

This is happening against a background of increasing self-confidence. China has survived the pandemic with fewer than 5,000 Covid-19 deaths and has restored

buoyant economic growth. Its superpower rival, the US, is politically crippled by deep and worsening internal divisions. (Almost half of them voted for Trump and three-quarters of those don’t believe Biden won the election).

Although the Biden presidency will ease relations between Washington and Beijing, it is not likely to resolve deep differences over geopolitical issues such as Hong Kong, Uighurs and the South China Sea, conflicts over international trade, and in particular the fight for dominance in high-technology areas such as semiconductors.

China is seriously dependent on foreign companies in the US, Taiwan, South Korea and Japan for its supplies of chips, the raw material of the digital age, the building-blocks of innovations from artificial intelligence to fifth-generation networking and autonomous vehicles. China spent $300 billion on imported chips last year. 

It’s easy to make low-grade chips for laptops, but it’s a very different matter for the advanced ones or FGPA circuits that can be programmed, which are essential for 5G broadband cellular and artificial intelligence.

Global production at this level is controlled by the US and its close allies. This became painfully apparent when the Trump administration barred companies worldwide from making chips for Huawei, the telecoms equipment giant. The US has also restricted American companies from supplying SMIC, China’s most advanced chipmaker, with the machines needed for making chips. Fewer than a tenth of such machines used in China are made by its domestic companies.

Beijing has been pouring huge amounts of money into developing the industry, but with very limited success so far. Hundreds of chip companies have failed because of lack of technical knowledge, or corrupt management such as diverting subsidies into unrelated property projects.

Six major projects have shut down over the past year including Wuhan Hongxin, which was supposed to be leading a $19 billion drive to produce China’s first 7-nanometer wafers – the level deemed de rigueur at the technology frontier.

Ambrose Evans-Pritchard says China “has some superb science labs and pockets of excellence in technology” – it landed a spacecraft on the back side of the moon last year – “but the Soviet Union also had brilliant scientists. That is not the same as a broad-based technological ecosystem.”

The leitmotif of Beijing’s new plans is a “dual circulation” strategy – switching from reliance on foreign trade to drive growth to one that combines both external markets and the vast internal one of 1.4 billion people, developing a technological powerhouse driven by indigenous innovation, and with a shift from economic growth at all costs to “quality” growth.

The problem with achieving these objectives, some analysts believe, is that Xi Jinping is making a big mistake by reverting to a Maoist economic management style that chokes free-enterprise, with commissars lodged inside private companies. Ideological poisons of the West are to be kept at a safe distance. A totalitarian state systematically chokes the exchange of ideas, the key to free-enterprise efficiency.

However, one of Beijing’s main goals of its new long-term development plans will be to attract foreign talent to bring about the high-tech breakthroughs it is determined to achieve, copying the highly successful policy pioneered in Singapore by Lee Kuan Yew, who consciously sought the employment of foreign talent via tax breaks and related incentives.

Chinese Regulators: Among the World’s Best

“It is truly incredible how wrong the bearish predictions have been over the past ten to 20 years, and how stubbornly they have been maintained,” says Jefferies’ Hong Kong-based global head of equity strategy, Christopher Wood.

The latest scare story is the default of Yongeheng Coal, a state-owned enterprise that amazingly was rated AAA when it raised a billion yuan through a bond issue in February. Investors have long believed that no state-owned companies would be allowed to go bust. The collapse of Yongeheng has proved that to be wrong.

Wood says he views this as a positive, not a negative, development. The authorities are sending a healthy signal that such enterprises are not always going to be bailed out when they get into trouble..

Wood also says the last-minute cancellation of the Ant Group’s Initial Public Offer, at $37 billion expected to be the biggest ever, when regulators intervened, was triggered by “entirely justified” prudential concerns (risk to investors) that the Alibaba subsidiary would not have “enough skin in the game” in its consumer lending business. Only a tiny 2 per cent of its extended credit is funded with its own money, the rest being funded by banks or asset-backed securities.

“History suggests that Chinese financial regulators have a track record of addressing issues before they blow up the system. Witness the deleveraging campaign of 2016-18 to rein in shadow banking excesses. By contrast, the track record of Western financial regulators is unfortunately the exact opposite.”

Managing Money Within the Family

We all know that money is a major factor in our lives. It may not be the key to happiness, but if you haven’t got enough of it, life sure can be miserable.

Money disputes are a principal cause of divorce. Money determines your lifestyle, your security when you’re getting on in years, even the degree of personal freedom you have to move around from place to place or job to job.

How much you have is not of overwhelming importance. One man or woman can be happy on $2,000 a month, another can be in financial trouble with $20,000 coming in. What matters is how you handle your money within the family.

Keeping the scale of your spending under control is only part of it. It’s also a matter of cutting out wasteful spending on the things that don’t really matter to you and your family. And of investing wisely.

Knowing how much you have should be the easiest part of it. Every worker knows his or her take-home pay, every stay-at-home partner the size of her or his monthly allowance. Yet many husbands won’t let their wives know what they earn, many wives squirrel away money saved out of housekeeping allowances in savings accounts kept secret.

Proper family money management is impossible if there is secrecy, mistrust, discrimination. Marriage is a financial partnership as well as an emotional, physical, spiritual and legal one

Even if one partner is obviously more suited to handle the business of controlling the family cash, the other (and to some extent the children, too) ought to know what’s coming in and where it’s going to. In two-income families, earnings should be pooled. Older children who are earning and living at home should be expected to make a contribution towards their upkeep.

After all the basic expenses have been paid, the investment of any savings and the spending of any surplus available on luxuries should be divided on an agreed and fair basis.

If one partner is a spender by nature then it’s best to keep family savings in the other’s name. But a wife should always have some funds of her own, whether or not she goes out to work. She should at least have a personal allowance, separate from the housekeeping money.

If both partners are working, both can handle money, and both run chequeing accounts, it’s important to allocate responsibility by mutual agreement on who pays what when it comes to the big bills – husband pays the mortgage, wife pays the domestic help, and so on.

Children should also have personal allowances (“pocket money”) from the age that they’re buying themselves treats at nearby shops. Teenagers should be given enough to allow them to buy their own clothing, as well as being encouraged to save money for big-money items such as smartphones, and to open and operate bank accounts. It’s an essential preparation for adulthood.

Within the limits of what you can afford, try to match your children’s allowances to the average of their friends’. Don’t give them substantially more. Your love for them can never be expressed in money, nor can cash ever be a substitute for love.

A Surprising Opportunity in Europe

Greece is an emerging market that investors should consider, says Jefferies’ Christopher Wood.

It now has what is probably the most pro-business government in Europe since the election victory of Konstantinos Mitsotakis in July last year. He immediately removed controls on capital transfers and within months scrapped capital gains tax. He now plans other reforms including replacing the pay-as-you-go pension scheme with a US-style 401-style individual retirement financing system.

A former McKinsey management consultant, Mitsotakis is so popular as prime minister that his New Democracy party is 21 percentage points ahead of the Left-wing opposition alliance.

Although Greece has been hit hard by the pandemic, there are grounds for optimism once its economy bounces back. It is in line for massive assistance from the European Union’s Recovery Fund — €32 billion, equivalent to 17 per cent of last year’s GDP. There is now evidence of a resumption of foreign direct investment. Microsoft has announced a billion-euro plan to build data centres; Volkswagen a “climate-neutral mobility” project on the island of Astypalata.

International capital markets have grown confident enough about the future to allow its government to raise €2 billion last October from a 15-year bond issue paying just 1.15 per cent. (At its worst in 2012 its ten-year bonds traded at a 37 per cent yield). Greece now also boasts the most university graduates per capita of any country in the Eurozone.

“If the current government can stay in power to its full mandate it has the potential to trigger a real transformation” of the economy, Wood says.

There are 184 companies listed on the Athens Stock Exchange, whose index has been trending sideways since it bounced back from the March Covid-19 shock in June.

Indonesia’s Major Reforms to Attract Investors

Indonesia has long been considered “Asia’s next big opportunity” says Kenneth Ng of Asian Discovery, the small-cap specialist. With over 267 million people, it has the world’s fourth largest population, with young demographics (more than two million enter the work-force every year) and abundant natural resources (coal, palm oil, natural gas).

Yet the country has not lived up to its potential due to self-imposed constraints, in particular poor infrastructure, a complex regulatory environment, and unfavourable labour laws.

When Joko “Jokowi” took the presidency in 2014 his first priority was to tackle the infrastructure issue with a $350 billion plan. Notable projects included a network of toll roads connecting all major cities on the island of Java, a new deep seaport, and a mass transit system for Jakarta to help alleviate the capital’s notorious traffic congestion.

Now he has succeeded in getting parliament to pass an Omnibus Bill for Job Creation to reform 79 laws seen to impede the nation’s competitiveness – the next key step to unlocking growth potential.

Labour reforms will be headed by a simplification of severance regulations, which are much tougher than those of its regional neighbours, discouraging businesses from expanding their work forces. The maximum severance payments borne by companies will be reduced from 32 months’ pay to 19.

Other business-friendly measures relating to employment including relaxation of foreign working permits requirement, a lifting of the maximum overtime allowed, and removal of the obligation to provide a two-month break for an employee in the seventh and eighth year of service.

Investors in Indonesia have faced a complicated business licensing process that can take up to two years and is often blighted by local authorities’ rent-seeking behaviour. The process will now be centralized with an on-line submission system. Local rules that conflict with central government regulations will be scrapped.

Access to the Indonesian market will be liberalized by opening up many sectors. In future access will be completely restricted to only six sectors such as narcotics, gambling and casinos, endangered flora and fauna.

To attract more direct investment from abroad, foreigners will be offered special visas for pre-investment visits. Those who invest and stay in the country will no longer be required to have a sponsor or guarantor.

Tax incentives will also be provided to investors who meet certain requirements such as providing technology transfer or investing in labour-intensive sectors. Dividends received by corporate and individual taxpayers will not be taxed if reinvested in Indonesia. Foreign property ownership rules will be relaxed. Foreign buyers with work permits will be entitled to freehold ownership of condominium units priced at $200,000 or more.

Jojowi wants relevant regulations to be drafted within three months and implemented quickly soon after. His plans are designed to achieve economic growth rates averaging 6 to 7 per cent a year this decade, with manufacturing industry targeted to contribute between 21 and 26 per cent of GDP by 2030 and 7 to 19 million jobs created.

The NTAsset Discovery Fund has 22 per cent of its portfolio in Indonesian stocks. Its holdings, all listed in Jakarta, are: ArwanaCitramulia (ARNA), BFI Finance (BFIN), Catur Sentosa (CSAP), Indocement (INTP), Intiland (DILD), Medikaloka Hermina (HEAL), PakuwonJati (PWON) and Surya Pertiwi (SPTO). The contact for further information is <karn@ntasset.com>, tel. +66 2679 6800.

Getting the Best Investment Advice

Most financial experts agree that it’s easier to earn money than it is to hang on to what you earn… and make it grow. This is because most people are too busy making money to afford the time to build up the knowledge and judgement that is needed to invest their capital for maximum return at minimum risk.

Many professional advisers are available. But few of them have a sufficiently broad knowledge to be able to advise you about all fields of investment.

Most of them singlemindedly recommend their particular field as the best, because it is the one they know and believe in – and often because it is the one where they can make money themselves, their commissions or profit margins depending on selling to you and others like you.

This commercial instinct also biases some advisers towards unduly optimistic sales talk about the money-making possibilities of the particular investments they recommend you should buy. “Talking up” the market promotes their business volume.

Often they can only sell an investment to you, not buy it from you (a life insurance policy, for example), which gives an additional reason for painting a rosy picture.

Yet… you need professional advisers, especially if you are investing in technically complex fields such as shares, collectables and insurance schemes.

Your best professional adviser is likely to be one who does not deal in the investment he advises on, does not receive commissions of any kind for promoting such investment, and earns his or her living from fees that you pay him directly (preferably not related to your volume of business).

For example, before buying a rare stamp or coin on auction, you would be wise to pay an expert to give his or her independent opinion on the item you are interested in buying.

Often it is not possible to find such advisers who also have sufficient knowledge and excellent judgement. Your alternative is to use advisers who are open with you about any financial advantage they receive through promoting your involvement in the investments they recommend.

You should build up a stable, long-term and honest relationship with such advisers over the years. If you are looking for an adviser, the old rule applies: Ask around for personal recommendations by friends, colleagues and relatives.

The greater your own knowledge, the better you will be able to judge the soundness of the advice you receive from specialists.

The simplest way to keep up-to-date on the broad investment scene is to read diligently the best magazine, newsletter or website on offer in your country that covers investment, particularly personal finance (which I call moneycraft). Build your own library of clippings and articles of useful information.

Specific information such as rates of return on particular investments will eventually become out-of-date. But the basic principles are timeless. If you follow them diligently, there is no reason why you shouldn’t become rich.

The effect of compounding (ploughing back what you earn to increase your capital, so it in turn earns more, increasing the amount available for ploughing back} is a marvellous thing.

In considering any investment, these are the basic principles that you should take into account: Annual rate of return before tax; tax payable on the return; risk; liquidity (ease with which you can convert your asset back into cash; price; timing (when it’s the best time to buy or sell); and the buy/sell margin (the difference between what you have to pay and what you would get back if you re-sold the asset immediately to the seller – also called the in-and-out cost).

Any investment decision requires a balancing-off of advantages against disadvantages, judgement on timing and future growth prospects, and matching of what’s on offer to your particular financial circumstances and personality.

Pandemic Winners and Losers

This year the abundance of credit available has boosted the ability of all companies to borrow money says Eoin Treacy of FullerTreacyMoney.  How is that going to turn out?

“For the industrial sector, the pandemic posed a unique challenge. Many businesses have been engaged in rationalization for years already. The pandemic led to revenues evaporating and it forced some extreme choices. Most companies have ‘kitchen-sinked’ write offs. In other words, they took every available loss now while bad news can be blamed on the pandemic. That suggests the industrials sector is heavily leveraged to recovery with little in the way of additional negative surprises.

“At the other end of the spectrum there is a large number of new companies with negative earnings which are totally dependent on the pandemic-driven demand growth continuing indefinitely. They are extremely interest rate sensitive because they are wholly dependent on access to liquidity to drive expansion.” Eoin gives as examples Beyond Meat, Zoom Media, Shopify and Dynatrace.

Forecasts for the World Economy

Investment bank Morgan Stanley expects the world to experience a broadbased economic recovery to take hold from March/April onwards, with global growth accelerating to 6.4 per cent for next year as a whole.

Driving the recovery out of the pandemic crisis will be a more expansive reopening of economies, and the extraordinary boost from monetary and fiscal policies. Global growth is on track to regain its pre-Covid trajectory by the second quarter of 2021. The bank expects China to return to its pre-pandemic path this quarter and the US to do so by the final quarter of next year.

After a prolonged period in which emerging markets faced a series of cyclical challenges, they are likely to bounce back strongly from the pandemic because of a widening US trade deficit, lower real rates of interest and a weaker dollar. Emerging economies excluding China, favoured by Chinese and their own stimulus policies, are forecast to deliver an average growth rate of 7.4 per cent next year.

Morgan Stanley predicts “a very different inflation dynamic taking hold, especially in the US. The Covid19 shock has accelerated the pace of restructuring. With policymakers running highly reflationary policies to regain pre-Covid levels of employment, wage pressures and inflation will pick up from the second quarter. The bank expects core inflation to rise to an annual rate of 2 per cent then, and to overeshoot thereafter.

The bank expects India’s economy to grow by 9.8 per cent next year; China’s by 9 per cent.

Goldman Sachs says the pandemic continues to be the big drag on economic activity, so the outlook still largely depends on prospects for controlling the virus, and therefore the timeline for restoring activity in high-contact service-providing industries such as tourism, hospitality, entertainment.

However, “it should be possible to recover a large portion of lost output over the next year. Investors should position for a broader and deeper global economic expansion in 2021 – which should favour risky assets in general, but the most growth-sensitive assets in particular, including commodities, cyclical equity sectors and emerging markets.

“Safe-haven assets such as the US dollar and US Treasuries should continue to underperform, especially if inflation expectations pick up.”

Metals Show the Way

Copper’s price has hit a seven-year high. Bloomberg reports that the recent surge for metals has been powered by expectations that deployment of coronavirus vaccines will ease global economic pain, and mean China isn’t the only region driving demand growth. A strong economic rebound has driven its imports to record levels this year, helping to offset lower demand in the rest of the world. China is the world’s biggest user of copper.

The red metal is also gaining traction as a bet on hawkish climate policies that will expand power networks, whose construction needs a lot of copper. A 1-megawatt wind turbine requires more than three tons of it. And electric vehicles need about four times more copper than the internal combustion cars they’re destined to replace.

The world’s biggest producers are Chile’s Codelco, Glencore, BHP Billiton, Freeport-McMoRan, Mexico’s Southern Copper and the Polish multinational KGHM.

Breaking Their Promise

The French government plans to renege on contracts it signed in the period 2006 to 2010 with companies to promote solar power because they are generating “excessive” profits. The collapse in prices of photovoltaic cells to one quarter of what they were, due to technology development, has left the government liable for payments for decades that are far in excess of the cost of new contracts.

Investors say the move could cripple their businesses, undermining the credibility of state promises and threatening future energy projects.

Much of the worldwide development of renewables has depended on state subsidies in various forms. Governments are discovering how costly they are, especially now there are other urgent priorities such as paying for the damage of pandemic policies.


Covid-19 defences: A group of medical researchers led by an independent coronavirus research scientist, Dr Gareth Davies, have formed an international alliance aiming to encourage governments to increase recommendations for vitamin D intake to 4,000 International Units daily to reduce Covid-19 hospitalizations. That’s ten times more than the British government’s recommendation of 400 IU a day.

An Australian specialist, Dr Peter Lewis, says there are nearly 30 studies demonstrating that having optimal levels of vitamin D reduce risks of Covid-19 infection, severe disease, death. Supplements to boost the vitamin are inexpensive and have low risk of toxicity. There is a “huge amount” of benefit to be gained from a daily dose.

Amazon. The European Union has announced anti-trust charges against the global giant over how it manages data from third-party sellers that may give it an unfair advantage. This move is the first in a regulatory process to punish Amazon for strategies said to distort competition in on-line retail markets in favour of its own retail offers and products of other companies that pay to use its logistics services.

Oil: Global markets are now in structural deficit argues the New York natural resource investment consultancy Goodring&Rosencwaijg. Inventories are now falling rapidly, suggesting “extreme tightness” will soon emerge in physical balances of crude oil. Excess stocks will disappear early next year.

Inflation:  The current global recession is deeply deflationary for the next few quarters, but will lead into high and volatile inflation in the long run – yet markets are not priced for it, says the largest publicly-traded hedge fund, the MAN Group.

Profits: Businesses that survive the pandemic could surprise investors with really good earnings next year and in 2022. “This would be the one bullish shock that could justify today’s lofty valuations,” says Rob Arnott of Research Affiliates.

India: It has opted out of the huge new Economic Partnership trade bloc linking 15 Asia-Pacific nations because it’s frightened about being swamped by the power of China’s industries.

Smartphones: The world’s top three supplying companies are now all Asian, with China’s Xiaomi displacing Apple in the July-September quarter to take third place after South Korea’s Samsung and China’s Huawei.

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