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China equity – A viable investment for long-term investors

China equity – A viable investment for long-term investors

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The COVID-19 epidemic in China is now mostly contained, allowing it to lift restrictions gradually and retraining our focus on the prospect of a post-coronavirus revival and the investment opportunities in the world’s second-largest economy.

Looking at longer-term trends, we believe investors should welcome the gradual inclusion of Chinese companies in global equity indices as they look for diversification and sustainable returns. Valuations that are currently more attractive than those of global equities enhance the opportunity. Furthermore, stock multiples could benefit from the Chinese market becoming more institutional in its makeup.

Below we list a number of reasons for our confidence in Chinese equities.[1]

 1. China is back at work

Over the past two months, China’s industry returned to nearly full capacity, even in Hubei region. In the services and consumer sectors, the recovery is progressing more slowly, constrained by partial travel restrictions and the loss of jobs and income. Overall, though, the gradual return to normality underscores how the government’s swift actions enabled the nation to get back on its feet relatively quickly.

Exhibit 1:

Exhibit 2:

2. Selective stimulus

In Q1 2020, China’s GDP contracted by 6.8% year-on-year. Full-year 2020 growth is likely to come in at around 3%, but with risks to the downside, depending on the pandemic’s development globally.

Since the Covid-19 outbreak, the People’s Bank of China (PBoC) has rolled out a series of measures to provide epidemic relief and stabilise demand. During the recent annual National People’s Congress, the key focus was the size of fiscal stimulus. Beijing’s spending plans imply a fiscal deficit of 8%-10% of 2020 GDP. This is less than the 12% of GDP deployed after the Global Financial Crisis.

More aggressive stimulus will be needed to support the resumption of normal operations, including more local government investment in infrastructure, education and public health. Tax and fee cuts are likely to support small and medium enterprises along with a lifting of restrictions on car purchases.

3. Easier access to China A-shares

The Stock Connect programme linking the Shanghai and Shenzhen markets to Hong Kong, launched in 2014, has made investing in onshore shares easier for international investors. They can deploy capital quickly, and the more than 1 500 stocks listed in Shanghai and Shenzhen offer investors abundant opportunities to earn alpha.

Growing participation by global investors is rendering the A-shares market more mature and is favouring long-term growth. This market provides more diversified access to structural growth opportunities, making it a complement to exposure in the China offshore markets.

As A-shares tend to be less sensitive to global market sentiment, the correlation of this market with the rest of the world is low. Adding A-shares to a portfolio can thus enhance the risk/return profile of emerging market equity exposure and even of a China offshore equity portfolio. We believe an all-China equity solution helps investors gain access to the full opportunity set, maximising the return potential.[2]

4. Key risks are monitored closely

Tensions between China and the US remain a focus for investors and we are following the situation closely.  One area of attention is the US Holding Foreign Companies Accountable Act. This requires foreign issuers of securities to establish that a foreign government does not own or control them. US-listed foreign companies will be delisted if the accounting oversight board cannot inspect the issuer’s accounting firm for three consecutive years.

We view the near-term risks as manageable. A forced delisting could happen by 2023 at the earliest. In the worst-case scenario, if Chinese American depositary receipts (ADRs) are forced to delist by then, the companies can opt to list in Hong Kong. One e-commerce giant has already done so and other leading companies including a leading online retailer and a prominent internet technology company are seeking to have a secondary listing there this month.[3]

We believe such a law should have a limited impact on the ability of Chinese companies to tap capital markets. Most Chinese firms have issued shares in Hong Kong and Shanghai rather than in the US in the past five years.

Besides, Chinese and US regulators have been negotiating on this oversight-related issue for years. There is still a possibility that compromises by China will allow it to be settled. In such a scenario, US exchanges will try to guide issuers to meet the requirements and maintain their listing in the interest of the exchanges and investors.

5. Three investment themes for long-term structural growth

Although digitalisation was already shaping China’s economy, the COVID-19 outbreak has accelerated the trend. We have sharpened our focus on tech localisation themes, cloud businesses, software and hardware.

We continue to see three structural trends that spur sustainable growth:

  • Technology innovation: China has shifted towards medium to high-end manufacturing. The size of the domestic market, higher R&D spending and a vast talent pool support this shift.
  • Consumption upgrading: We see significant growth opportunities, especially in services. Rising household income, low household debt and more diversified consumer profiles support this trend.
  • Industry consolidation: We believe this trend has longer to run in an environment of slower growth. The emergence of leading companies should provide attractive investment opportunities. Faster industry consolidation should play favourably for industry leaders over the long term.

Portfolio strategy over the long term

In summary, while investors should not overlook the risks, we believe China is too big to ignore. It is essential for investors to monitor events closely given the market’s history of volatility. Changes in valuations and earnings may necessitate tactical portfolio adjustments. Navigating China’s waters requires local expertise and a well-resourced investment team to capture the long-term growth opportunities.

Our latest webcast China’s growth challenged covers the economic and market implications for China’s growth of the COVID-19 crisis amid a trade war. We also discuss the policy and structural reform outlook after the recent National People’s Congress. We highlight our long-term portfolio strategy and its focus on structural growth stories.


[1] Click here to watch our China’s growth challenged webcast with Caroline Yu Maurer and Chi Lo

[2] For information on our strategies or investment policies, please contact your dedicated client relationship manager.

[3] Source: China’s JD.com, NetEase Win Hong Kong Approval for Listings.


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Jessica Tea. The post China equity – A viable investment for long-term investors appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management.

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Tesla rival Polestar reveals lineup of its new electric vehicles

The Sweden-based electric vehicle maker completes key testing before launching production of its new SUV.

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Tesla's Model Y crossover, the best-selling vehicle globally, is the standard that electric vehicle makers strive to compete with. The Austin, Texas, automaker sold about 267,200 Model Y vehicles in the first three months of the year and continued leading the pack well into the second quarter.

It's no wonder that the Model Y is leading all vehicles in sales as it retails for about $39,390 after tax credits and estimated gas savings. Ford  (F) - Get Free Report hopes to compete with the Model Y about a year from now when it rolls out the new Ford Explorer SUV that is expected to start at $49,150.

Related: Honda unveils surprising electric vehicles to compete with Tesla

Plenty of competition in electric SUV space

Mercedes-Benz (MBG) however, has a Tesla rival model with its EQB all-electric compact sports utility vehicle with an estimated 245 mile range on a charge with 70.5 kWh battery capacity, 0-60 mph acceleration in 8 seconds and the lowest price of its EVs at a $52,750 manufacturers suggested retail price.

Tesla's Model X SUV has a starting price of about $88,490, while the Model X full-size SUV starts at $98,490 with a range of 348 miles. BMW's  (BMWYY) - Get Free Report xDrive50 SUV has a starting price of about $87,000, a range up to 311 miles and accelerates 0-60 miles per hour in 4.4 seconds.

Polestar  (PSNY) - Get Free Report plans to have a lineup of five EVs by 2026. The latest model that will begin production in the first quarter of 2024 is the Polestar 3 electric SUV, which is completing its development. The vehicle just finished two weeks of testing in extreme hot weather of up to 122 degrees in the desert of the United Arab Emirates to fine tune its climate system. The testing was completed in urban cities and the deserts around Dubai and Abu Dhabi.

“The Polestar 3 development and testing program is progressing well, and I expect production to start in Q1 2024. Polestar 3 is at the start of its journey and customers can now visit our retail locations around the world to see its great proportions and sit in its exclusive and innovative interior,” Polestar CEO Thomas Ingenlath said in a statement.

Polestar 3 prototype is set for production in the first quarter of 2024.

Polestar

Polestar plans 4 new electric vehicles

Polestar 3, which will compete with Tesla's Model X, Model Y, BMW's iX xDrive50 and Mercedes-Benz, has a starting manufacturer's suggested retail price of $83,000, a range up to 300 miles and a charging time of 30 minutes. The company has further plans for the Polestar 4, an SUV coupé that will launch in phases in late 2023 and 2024, as well as a Polestar 5 electric four-door GT and a Polestar 6 electric roadster that the company says "are coming soon." 

The Swedish automaker's lone all-electric model on the market today is the Polestar 2 fastback, which has a manufacturer's suggested retail price of $49,900, a range up to 320 miles and a charging time of 28 minutes. The vehicle accelerates from 0-60 miles per hour in 4.1 seconds. Polestar 2 was unveiled in 2019 and delivered in Europe in July 2020 and the U.S. in December 2020.

Polestar 1, the company's first vehicle, was a plug-in hybrid that went into production in 2019 and was discontinued in late 2021, according to the Polestar website.

The Gothenburg, Sweden, company was established in 1996 and was sold to Geely affiliate Volvo in 2015.

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Fauci And The CIA: A New Explanation Emerges

Fauci And The CIA: A New Explanation Emerges

Authored by Jeffrey A. Tucker via Brownstone Institute,

Jeremy Farrar’s book from August 2021…

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Fauci And The CIA: A New Explanation Emerges

Authored by Jeffrey A. Tucker via Brownstone Institute,

Jeremy Farrar’s book from August 2021 is relatively more candid than most accounts of the initial decision to lock down in the US and UK. “It’s hard to come off nocturnal calls about the possibility of a lab leak and go back to bed,” he wrote of the clandestine phone calls he was getting from January 27-31, 2020. They had already alerted the FBI and MI5. 

“I’d never had trouble sleeping before, something that comes from spending a career working as a doctor in critical care and medicine. But the situation with this new virus and the dark question marks over its origins felt emotionally overwhelming. None of us knew what was going to happen but things had already escalated into an international emergency. On top of that, just a few of us – Eddie [Holmes], Kristian [Anderson], Tony [Fauci] and I – were now privy to sensitive information that, if proved to be true, might set off a whole series of events that would be far bigger than any of us. It felt as if a storm was gathering, of forces beyond anything I had experienced and over which none of us had any control.”

At that point in the trajectory of events, intelligence services on both sides of the Atlantic had been put on notice. Anthony Fauci also received confirmation that money from the National Institutes of Health had been channeled to the offending lab in Wuhan, which meant that his career was on the line. Working at a furious pace, the famed “Proximal Origin” paper was produced in record time. It concluded that there was no lab leak. 

In a remarkable series of revelations this week, we’ve learned that the CIA was involved in trying to make payments to those authors (thank you whistleblower), plus it appears that Fauci made visits to the CIA’s headquarters, most likely around the same time. 

Suddenly we get some possible clarity in what has otherwise been a very blurry picture. The anomaly that has heretofore cried out for explanation is how it is that Fauci changed his mind so dramatically and precisely on the merit of lockdowns for the virus. One day he was counseling calm because this was flu-like, and the next day he was drumming up awareness of the coming lockdown. That day was February 27, 2020, the same day that the New York Times joined with alarmist propaganda from its lead virus reporter Donald G. McNeil

On February 26, Fauci was writing: “Do not let the fear of the unknown… distort your evaluation of the risk of the pandemic to you relative to the risks that you face every day… do not yield to unreasonable fear.”

The next day, February 27, Fauci wrote actress Morgan Fairchild – likely the most high-profile influencer he knew from the firmament – that “be prepared to mitigate an outbreak in this country by measures that include social distancing, teleworking, temporary closure of schools, etc.”

To be sure, twenty-plus days had passed between the time Fauci alerted intelligence and when he decided to become the voice for lockdowns. We don’t know the exact date of the meetings with the CIA. But generally until now, most of February 2020 has been a blur in terms of the timeline. Something was going on but we hadn’t known just what. 

Let’s distinguish between a proximate and distal cause of the lockdowns.

The proximate cause is the fear of a lab leak and an aping of the Wuhan strategy of keeping everyone in their homes to stop the spread. They might have believed this would work, based on the legend of how SARS-1 was controlled. The CIA had dealings with Wuhan and so did Fauci. They both had an interest in denying the lab leak and stopping the spread. The WHO gave them cover. 

The distal reasons are more complicated. What stands out here is the possibility of a quid pro quo. The CIA pays scientists to say there was no lab leak and otherwise instructs its kept media sources (New York Times) to call the lab leak a conspiracy theory of the far right. Every measure would be deployed to keep Fauci off the hot seat for his funding of the Wuhan lab. But this cooperation would need to come at a price. Fauci would need to participate in a real-life version of the germ games (Event 201 and Crimson Contagion). 

It would be the biggest role of Fauci’s long career. He would need to throw out his principles and medical knowledge of, for example, natural immunity and standard epidemiology concerning the spread of viruses and mitigation strategies. The old pandemic playbook would need to be shredded in favor of lockdown theory as invented in 2005 and then tried in Wuhan. The WHO could be relied upon to say that this strategy worked. 

Fauci would need to be on TV daily to somehow persuade Americans to give up their precious rights and liberties. This would need to go on for a long time, maybe all the way to the election, however implausible this sounds. He would need to push the vaccine for which he had already made a deal with Moderna in late January. 

Above all else, he would need to convince Trump to go along. That was the hardest part. They considered Trump’s weaknesses. He was a germaphobe so that’s good. He hated Chinese imports so it was merely a matter of describing the virus this way. But he also has a well-known weakness for deferring to highly competent and articulate professional women. That’s where the highly reliable Deborah Birx comes in: Fauci would be her wingman to convince Trump to green-light the lockdowns. 

What does the CIA get out of this? The vast intelligence community would have to be put in charge of the pandemic response as the rule maker, the lead agency. Its outposts such as CISA would handle labor-related issues and use its contacts in social media to curate the public mind. This would allow the intelligence community finally to crack down on information flows that had begun 20 years earlier that they had heretofore failed to manage. 

The CIA would hobble and hamstring the US president, whom they hated. And importantly, there was his China problem. He had wrecked relations through his tariff wars. So far as they were concerned, this was treason because he did it all on his own. This man was completely out of control. He needed to be put in his place. To convince the president to destroy the US economy with his own hand would be the ultimate coup de grace for the CIA. 

A lockdown would restart trade with China. It did in fact achieve that. 

How would Fauci and the CIA convince Trump to lock down and restart trade with China? By exploiting these weaknesses and others too: his vulnerability to flattery, his desire for presidential aggrandizement, and his longing for Xi-like powers over all to turn off and then turn on a whole country. Then they would push Trump to buy the much-needed personal protective equipment from China. 

They finally got their way: somewhere between March 10 or possibly as late as March 14, Trump gave the go ahead. The press conference of March 16, especially those magical 70 seconds in which Fauci read the words mandating lockdowns because Birx turned out to be too squeamish, was the great turning point. A few days later, Trump was on the phone with Xi asking for equipment. 

In addition, such a lockdown would greatly please the digital tech industry, which would experience a huge boost in demand, plus large corporations like Amazon and WalMart, which would stay open as their competitors were closed. Finally, it would be a massive subsidy to pharma and especially the mRNA platform technology itself, which would enjoy the credit for ending the pandemic. 

If this whole scenario is true, it means that all along Fauci was merely playing a role, a front man for much deeper interests and priorities in the CIA-led intelligence community. This broad outline makes sense of why Fauci changed his mind on lockdowns, including the timing of the change. There are still many more details to know, but these new fragments of new information take our understanding in a new and more coherent direction. 

Jeffrey A. Tucker is Founder and President of the Brownstone Institute. He is also Senior Economics Columnist for Epoch Times, author of 10 books, including Liberty or Lockdown, and thousands of articles in the scholarly and popular press. He speaks widely on topics of economics, technology, social philosophy, and culture.

Tyler Durden Thu, 09/28/2023 - 17:40

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North Korea Enshrines “Permanent” Nuclear Power Status In Constitution

North Korea Enshrines "Permanent" Nuclear Power Status In Constitution

On Thursday North Korean state media quoted leader Kim Jong Un as saying…

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North Korea Enshrines "Permanent" Nuclear Power Status In Constitution

On Thursday North Korean state media quoted leader Kim Jong Un as saying more advanced atomic weapons are needed to counter the threat from the United States.

This signals the death knell for Washington's long stated policy goal of denuclearization of the Korean peninsula, given that the remarks came as Kim enshrined the DPRK's status as a permanent nuclear power in its constitution.

North Korea's "nuclear force-building policy has been made permanent as the basic law of the state, which no one is allowed to flout," Kim told the State People's Assembly, according to state-run KCNA.

KCNA via AP

Starting last year he declared the north as an "irreversible" nuclear weapons state, and has in the last couple months ramped up ballistic missile tests in response to intermittent, ongoing joint US military drills with the south. This has already been a record year in terms of the number of Pyongyang's missile tests.

The north's rubber-stamp parliament, which met Tuesday and Wednesday, has approved the nuclear update to the constitution. Kim described that this was necessary as the United States has "maximized its nuclear war threats to our Republic by resuming the large-scale nuclear war joint drills with clear aggressive nature and putting the deployment of its strategic nuclear assets near the Korean peninsula on a permanent basis."

In July, the nuclear-armed USS Kentucky Navy ballistic missile submarine made a port call in South Korea, which marked a first in decades. It has stayed there since, enraging Pyongyang.

Kim in his Thursday address also blasted growing defense cooperation between Washington, Seoul and Tokyo as the "worst actual threat," saying that as a result "it is very important for the DPRK to accelerate the modernization of nuclear weapons in order to hold the definite edge of strategic deterrence."

A similar message was delivered in New York on Tuesday by Kim Song, North Korea's representative at the UN, who said in an address to the UN General Assembly that the region is close to the "brink of a nuclear war"

"Owing to the reckless and continued hysteria of nuclear showdown on the part of the US and its following forces, the year 2023 has been recorded as an extremely dangerous year that the military security situation in and around the Korean peninsula was driven closer to the brink of a nuclear war," he said.

"Due to [Seoul’s] sycophantic and humiliating policy of depending on outside forces, the Korean peninsula is in a hair-trigger situation with imminent danger of nuclear war," the ambassador continued. He further blasted the US for attempting to erect an "Asian NATO" that will bring a "new Cold War structure to northeast Asia."

Tyler Durden Thu, 09/28/2023 - 17:20

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