Five insights in five minutes
Hong Kong equities
Mirroring a sharp rise in virus cases, the Hang Seng has now lost all of the gains it made earlier in July. Rather than leap into Kowloon Bay, however, investors can focus on three positives. The first is a surge in money supply last month – the biggest in two years. As you can see in the chart below, this has tended to accompany shares higher over the past decade or so. Second, mainland buyers are not discouraged. Aggregate stock connect flows via Shanghai and Shenzhen were net positive for the last five days of July, as covid-related news worsened. Finally, Hong Kong stocks trade on a price-to-book ratio of one times, which suggests returns will never exceed their cost of capital and companies are worth nothing more than the value of their net assets. Quite a big assumption, that.
Many of the supposedly smartest (and definitely richest) fixed income managers in the world have wrongly predicted the top in government bond prices over the past few years. And since markets went crazy in March, once again sovereign yields in Europe have resumed their relentless downward trend. Indeed, if it looks from the ruler-straight lines below that prices are being manipulated, that is of course because they are. The Bank of England’s asset purchase facility is buying like crazy, for example, and now owns 40 per cent of outstanding gilts, equivalent to roughly a quarter of the UK’s gross domestic product. That is the same, as a proportion of output, as the European Central Bank’s programmes hold of Italian and Spanish debt. The ECB also owns French government bonds to the tune of a fifth of output, and bunds equivalent to 17 per cent of the size of the German economy. No wonder returns are range-bound for now.
BP halved its dividend this week, in line with the average year on year cut in the second quarter for the top 100 companies listed in London. Investors should not be disheartened, however. Purists know that high or low payouts do not alter the underlying value of their equity portfolios one bit. Meanwhile those who prefer a yearly cheque regardless should note that globally dividends are only estimated to be down by a fifth according to our strategists, thanks in part to stronger corporate balance sheets in Asia. What is more, payouts are forecast to recover most this year’s drop in 2021, before settling down to mid-single digit growth after that. Discounting these dividends equates to an excess return over risk-free assets for global equities of about four percent – not bad given low returns elsewhere.
There has been a lot of doom and gloom about the dollar, it is nearly four per cent lower versus a basket of major currencies this year. But an almost five and a half per cent decline against the euro is off-set by a modest rise in sterling and a nearly 20 per gain in pesos, with Mexico a major trading partner. So is China, where despite superior resilience during the pandemic the renminbi is only flat against the dollar. For the world’s two largest economies, the chart below shows the correlation between their exchange rates and the difference between the yields on ten-year sovereign debt. The two lines tracked each other nicely for years up until President Trump started threatening tariffs in early 2019. This means investors in renminbi or dollar assets will need to keep one eye on Chinese and US interest rates and the other on those White House tweets.
Such is the speed and magnitude of change during the pandemic that economists are not sure whether to rely on slow but robust old-school data or new and less-tested sources of live information. Who can blame them? Take the monthly surveys of the world’s service sectors, out this week. France’s was a lofty 57.3 (above 50 signals improvement) while the US recorded 58.1 – the fastest expansion for America since February last year. Yet so-called alternative data for the two countries are less buoyant. The latest mobility numbers, in the chart below, suggests that activity in Paris and New York is recovering only modestly. On the other hand, movement levels in Taiwan, South Korea, Hong Kong and Singapore are some of the strongest globally while the manufacturing PMIs in all four either showed those economies to be flat or contracting.
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