Mechelany Advisors' WEEKLY MARKET REVIEW highlights the salient feature of the past week, details specific issues of the moment and reviews the Mechelany Advisors' MODEL PORTFOLIO, CHINA DEEP VALUE PORTFOLIO and the CHINA BANKS PORTFOLIO
As we are entering the worst seasonal period for equity markets, September and October being the worst performing months historically, equities recorded a seventh consecutive month of advances with most having delivered between 15 and 25 % performances year-to-date, a remarkable feature.
Considering the ability of the Chinese economy to weather the pandemic in 2020 and its strength in 2021, one would have expected Chinese equities to be at the top of the performance league.
But they are not and their sharp underperformance is an illustration of the fact that markets are not rational, that liquidity is a key driver of equity markets AND that there are other significant factors that influence the propensity of investors to put high or low valuations on equities.
As we know, US equities are the most overvalued they have ever been in history. The following chart from Wilshire Associates plots the US stock market capitalisation to GDP ratio since the 1970s, a favorite measure of valuation of Warren Buffet.
The unusual rise in the indicator since March 2020 reveals the phenomenal impact of liquidity and the bubbly characteristics US equities are evident. Timing the top of this bubble is clearly challenging but considering how extreme negative real bond yields are, it is only a matter of time before Central Banks are forced to Taper and normalise interest rates.
The disappointing US job numbers released on Friday, may delay the process by another couple of months, but we could well end up with the worst of all worlds: Stagflation.
Besides liquidity differentials, there is a narrative running through financial markets at the moment trying to explain the difference in performance between US and Chinese Assets.
It is the whole debate between XI Jing Ping’s “COMMON PROSPERITY” against the ongoing logic of Western democracies in the pursuit of “SOCIALISM FOR THE RICH”.
It can be summarised by starkly differing visions about society and the Western fascination for individualism and the BILLIONAIRES’ STARDOM culture
Socialism for the Rich
Since the 2008 Great Financial crisis , massive fortunes have been made by entrepreneurs thanks to the stock market and a culture of Billionaires’ Stardom has taken hold,
With the counter cyclical Trump tax cuts in 2018 and the exceptional liquidity and stimuluses enacted during the pandemic, the phenomenon has been exacerbated and an entire new breed of young investors trading the markets through online platforms and cryptocurrencies has also induced a get-rich-quick mentality with the youth.
In most developed countries, inequality is rising sharply, and has been rising for some time.
Many people believe this is a problem, but, equally, many in the West think there’s not much we can do about it.
After all, the argument goes, globalisation and new technology have created an economy in which those with highly valued skills or talents can earn huge rewards.
As a result, Inequality inevitably rise and potentially creates an acute social problem.
Last week’s massive pay out of 750 Millions US dollars to Apple’s CEO Tim Cook is an example of the increasing wedge between the super rich – about 1 % of the US population – and the 45 million Americans living under the threshold of poverty.
Attempting to reduce inequality via redistributive taxation has not been successful until now, because the corporate world knows how to play the taxation code to their advantage, and the global elite tend to hide their money through charitable institutions or tax havens.
One strange thing about the current situation in the west, is how it stands in stark contrast to the economic orthodoxy that existed from roughly 1945 until 1980, which held that rising inequality was not inevitable, and that various government policies could reduce it.
In these decades, Government policies to reduce inequalities appear to have been successful. Inequality fell in most countries from the 1940s to the 1970s.
The sharp rise in inequality we see today is largely due to changes since 1980.
In both the US and the UK, from 1980 to 2019, the share of total income going to the top 1% has more than doubled.
After allowing for inflation, the earnings of the bottom 90% in the US and UK have barely risen at all over the past 25 years. More generally, 50 years ago, a US CEO earned on average about 20 times as much as the typical worker. Today, the CEO earns in excess of 350 times as much.
Any argument that rising inequality is largely inevitable in our globalised economy faces a crucial objection. Since 1980 some countries have experienced a big increase in inequality (the US and the UK); some have seen a much smaller increase (Canada, Japan, Italy), while inequality has been stable or falling in others (France, Belgium and Hungary).
So rising inequality is not inevitable. And the extent of inequality within a country cannot be solely determined by long-run global economic forces, because, although most richer countries have been subject to broadly similar forces, the experiences of inequality have differed.
The main explanation for this rising inequality is the huge shift in mainstream economic, cultural and political thinking, in favour of free markets, triggered by the elections of Ronald Reagan and Margaret Thatcher in the a980s.
Its fit with the facts is undeniable. Across developed economies, the biggest rise in inequality since 1945 occurred in the US and UK from 1980 onwards
The idea that rising inequality is inevitable has begun to look like a convenient myth, one that allows us to avoid thinking about another possibility: that through our electoral choices and decisions in daily life we have supported rising inequality, or at least acquiesced in it.
The Billionaire’s stardom system propagated by the social media has further pushed the idea that happiness was about becoming a billionaire.
Surveys in the UK and US consistently suggest that we underestimate both the level of current inequality and how much it has recently increased. The surveys reveal a change in attitudes: rising inequality has become acceptable and has become less unacceptable if you are on the wrong end of it.
Inequality is unlikely to fall much in the future unless attitudes turn unequivocally against it. Among other things, people will need to accept that how much people earn in the market is often not what they deserve, and that the tax they pay is not taking from what is rightfully theirs.
One crucial reason why the western democracies have done so little to reduce inequality in recent years is that they downplay the role of luck and of external factors such as liquidity, share buybacks and speculation in achieving success.
Ignoring the good luck behind success helps people feel good about it, and makes it much easier to feel they deserve the rewards associated with success. High earners may truly believe that they deserve their income because they are vividly aware of how hard they have worked and the obstacles they have had to overcome to be successful.
But the truth of the matter is that CEOs become rich because the only benchmark is how high they can drive their stock prices, whether through stock buybacks at inflated valuations, or through massive leverage at zero cost money.
But this is not true everywhere. Support for the idea that you deserve what you get varies from country to country. And in fact, support for such beliefs is stronger in countries where there seems to be stronger evidence that contradicts them.
Attitude surveys have consistently shown that, compared to US residents, Europeans are roughly twice as likely to believe that luck is the main determinant of income and that the poor are trapped in poverty.
Similarly, people in the US are about twice as likely as Europeans to believe that the poor are lazy and that hard work leads to higher quality of life in the long run.
European countries have, on average, more redistributive tax systems and more welfare benefits for the poor than the US, and therefore less inequality, after taxes and benefits.
Many people see this outcome as a reflection of the different values that shape US and European societies. But cause-and-effect may run the other way: you-deserve-what-you-get beliefs are strengthened by inequality. In Europe, Denmark is one of the highest tax country with the highest social welfare, the least inequalities and nevertheless a sense of shared happiness
Psychologists have shown that people have motivated beliefs: beliefs that they have chosen to hold because those beliefs meet a psychological need.
Now, being poor in the US is extremely tough, given the meagre welfare benefits and high levels of post-tax inequality. So Americans have a greater need than Europeans to believe that you deserve what you get and you get what you deserve. These beliefs play a powerful role in motivating yourself and your children to work as hard as possible to avoid poverty. And these beliefs can help alleviate the guilt involved in ignoring a homeless person begging on your street.
This is not just a US issue. Britain is an outlier within Europe, with relatively high inequality and low economic and social mobility. Its recent history fits the cause-and-effect relationship there.
Following the election of Margaret Thatcher in 1979, inequality rose significantly. After inequality rose, British attitudes changed. More people became convinced that generous welfare benefits make poor people lazy and that high salaries are essential to motivate talented people.
If the American Dream and other narratives about everyone having a chance to be rich were true, one would expect the opposite relationship: high inequality is fair because of high intergenerational mobility, whereby younger generations get richer and have a better lifestyle than their parents.
Instead, what the numbers are showing is the opposite… Some happy few can get very rich, but for the vast majority, life is a struggle and people are less protected in case of accidents of life.
Inequality begets further inequality. As the top 1% grow richer, they have more incentive and more ability to enrich themselves further. They exert more and more influence on politics, from election-campaign funding to lobbying over particular rules and regulations.
The result is a stream of policies – see Donald Trump -that help them but are inefficient for the rest of society.
Leftwing critics have called it “socialism for the rich”. Even the billionaire investor Warren Buffett seems to agree: “There’s been class warfare going on for the last 20 years and my class has won,” he once said.
This process has been most devastating when it comes to taxes. High earners have most to gain from income tax cuts, and more spare cash to lobby politicians for these cuts. Once tax cuts are secured, high earners have an even stronger incentive to seek pay rises, because they keep a greater proportion of after-tax pay. And so on.
Although there have been cuts in the top rate of income tax across almost all developed economies since 1979, it was the UK and the US that were first, and that went furthest.
In 1979, Thatcher cut the UK’s top rate from 83% to 60%, with a further reduction to 40% in 1988. Reagan cut the top US rate from 70% in 1981 to 28% in 1986. Although top rates today are slightly higher – 28 % in the US and 45% in the UK – the numbers are worth mentioning because they are strikingly lower than in the post-second-world-war period, when top tax rates averaged 75% in the US and were even higher in the UK.
Some elements of the Reagan-Thatcher revolution in economic policy, such as Milton Friedman’s monetarist macroeconomics, have subsequently been abandoned. But the key policy idea to come out of microeconomics has become so widely accepted today that it has acquired the status of common sense: that tax discourages economic activity and, in particular, income tax discourages work.
This doctrine seemingly transformed public debate about taxation from an endless argument over who gets what, to the promise of a bright and prosperous future for all.
The “for all” bit was crucial: no more winners and losers. Just winners. And the basic ideas were simple enough to fit on the back of a napkin
One evening in December 1974, a group of ambitious young conservatives met for dinner at the Two Continents restaurant in Washington DC. The group included the Chicago University economist Arthur Laffer, Donald Rumsfeld (then chief of staff to President Gerald Ford), and Dick Cheney (then Rumsfeld’s deputy, and a former Yale classmate of Laffer’s).
While discussing Ford’s tax increases, Laffer pointed out that, like a 0% income tax rate, a 100% rate would raise no revenue because no one would bother working. Logically, there must be some tax rate between these two extremes that would maximise tax revenue.
Although Laffer does not remember doing so, he apparently grabbed a napkin and drew a curve on it, representing the relationship between tax rates and revenues. The Laffer curve was born and, with it, the idea of trickle-down economics.
The key implication that impressed Rumsfeld and Cheney was that, just as tax rates lower than 100% must raise more revenue, cuts in income tax rates more generally could raise revenue. In other words, there could be winners, and no losers, from tax cuts.
But could does not mean will. No empirical evidence was produced in support of the mere logical possibility that tax cuts could raise revenue, and even the economists employed by the incoming Reagan administration six years later struggled to find any evidence in support of the idea.
In fact, quite the opposite happened. With Donald Trump’s tax cut in 2018, the US Budget deficits and Public debt went roaring up. By the way, Laffer was also a campaign adviser to Donald Trump.
For income tax cuts to raise tax revenue, the prospect of higher after-tax pay must motivate people to work more. The resulting increase in GDP and income may be enough to generate higher tax revenues, even though the tax rate itself has fallen. Although the effects of the big Reagan tax cuts are still disputed (mainly because of disagreement over how the US economy would have performed without the cuts), even those sympathetic to trickle-down economics conceded that the cuts had negligible impact on GDP – and certainly not enough to outweigh the negative effect of the cuts on tax revenues.
On the other hand, corporate and personal tax cuts combined with massive liquidity and zero interest rates sent asset prices soaring and one major issue has been the ability to buy back shares.
It is often assumed that if the top 1% is incentivised by income tax cuts to earn more, those higher earnings reflect an increase in productive economic activity.
In other words, the pie gets bigger for everyone. But some economists, including the influential Thomas Piketty, have shown this was not true for CEOs and other top corporate managers following the tax cuts in the 1980s. Instead, they essentially funded their own pay rises by paying shareholders less, which led in turn to lower dividend tax revenue for the government.
In fact, Piketty and colleagues have argued that the revenue-maximising top income tax rate may be as high as 83%.
The income tax cuts for the rich of the past 40 years were originally justified by economic arguments: Laffer’s rhetoric was seized upon by politicians. But to economists, his ideas were both familiar and trivial. Modern economics provides neither theory nor evidence proving the merit of these tax cuts. Both are ambiguous. Although politicians can ignore this truth for a while, it suggests that widespread opposition to higher taxes on the rich is ultimately based on reasons beyond economics.
In the current western democracies culture, the only function of the state is to support private ownership rights (maintaining a legal system, police, and so on) and let the entrepreneurs invest, hire people and benefit the economy because they get richer.
But In the real world, all economic activity reflects the influence of government.
Markets are inevitably defined and shaped by government. There is no such thing as income earned before government comes along.
The circumstances of our birth and subsequent health reflects the healthcare available. Even if that healthcare is entirely “private”, it depends on the education of doctors and nurses, and the drugs and other technologies available.
Like all other goods and services, these in turn depend on the economic and social infrastructure, including transport networks, communications systems, energy supplies and extensive legal arrangements covering complex matters such as intellectual property, formal markets such as stock exchanges, and jurisdiction across national borders. .
Talks of personal wealth as totally individualistic turns out to be a variation on the egotistical tendency to see one’s success in splendid isolation, ignoring the contribution of past generations, eco-system and government.
Much of the individual wealth created today in the Western democracies and the subsequent inequalities is more down to decisions made by governments than to irreversible market forces.
These decisions can be changed. However, if Governments want to redue inequality: they must make inequality reduction a central aim of government policy and wider society.
The most entrenched, self-deluding and self-perpetuating justifications for inequality are about morality, not economy.
And this is where Xi Jing Ping’s drive to ” Common Prosperity” comes into the picture…
One of the most feared narrative in the financial markets today is China’s Government claim to achieve ” Common Prosperity”
President Xi Jinping has called achieving “common prosperity” as a strategic priority, seeking to narrow a yawning wealth gap that threatens the cohesion of the Chinese Society.
The call does not stop with wealth inequalities and Billionaires stardom but also tackles the stardom system of Social Media stars, influencers, and more globally the Western values of individuals rising above the common lot.
“Common prosperity” as an idea is not new in China, but a sharp escalation in official rhetoric and a crackdown on excesses in industries including technology and private tuition has rattled foreign investors in the world’s second-largest economy, leading them to question “investability” in China.
Xi is turning towards inequality after concluding a campaign to eliminate absolute poverty, pledging to make “solid progress” towards common prosperity by 2035 and “basically achieve” the goal by 2050.
“Common prosperity” was first mentioned in the 1950s by Mao Zedong, founding leader of what was then an impoverished country, and repeated in the 1980s by Deng Xiaoping, who modernised an economy devastated by the Cultural Revolution, its 50 million death and a population brainwashed by a communist ideology of the dictatorship of the People.
Deng Xiao Ping’s pivoting was all about allowing individuals, corporations and regions to get rich, invest to speed up economic growth and help achieve the ultimate goal of common prosperity.
Deng’s famous analogy ” Never mind the colour of the cat as long as he catches the mice” was the cornerstone of the shift of China towards a market economy.
Over the past 40 years, China became an economic powerhouse under a hybrid policy of “socialism with free enterprise”and lifted more than 800 million people out of poverty, a unique social and economic achievement in the history of humanity.
But it also came at a price and that was to deepen inequalities, especially between urban and rural areas, a divide that does threaten social stability and cohesion.
This year, Xi has signalled a heightened commitment to delivering common prosperity, emphasising it is not just an economic objective but core to the party’s governing foundation.
Government Officials say that common prosperity is not egalitarianism and does not question the free market logic of the Chinese economy. Senior party officials say that “common prosperity” does not mean “killing the rich to help the poor” but is all about preserving the Chinese culture of the superior interest of the community over the interests of individuals.
A pilot programme in Zhejiang province, one of China’s wealthiest, is designed to narrow the income gap there by 2025.Chinese leaders have pledged to use taxation and other income redistribution levers to expand the proportion of middle-income citizens, boost incomes of the poor, “rationally adjust excessive incomes”, and ban illegal incomes.
Beijing has explicitly encouraged high-income firms and individuals to contribute more to society via the so-called “third distribution”, which refers to charity and donations.
Several tech industry heavyweights have announced major donations and support for disaster relief efforts. Online gaming giant Tencent Holdings has said it will spend 100 billion yuan ($15.47 billion) on common prosperity and Jack Ma’s Ali Baba announced the same last week.
Long-discussed reforms such as implementing property and inheritance taxes to tackle the wealth gap are gaining new impetus. A property tax has been discussed for years and two pilots have been implemented in Shanghai and Chongqing since 2011, but little progress has been made until now.
Increasing incomes and improved public services, especially in rural areas, would be positive for consumption, and a better social safety net would lower precautionary savings, freeing cash for immediate consumption
The common prosperity goal are expected to speed China’s economic rebalancing towards consumption driven growth and reduce reliance on exports and investment.
But the key issue at stake here is the cohesion of the Chinese social fabric and its desire to quash the development of the Western culture of the Billionaire’s Stardom.
Let us make a few comments here :
First, foreign commentators would be well advised to fully understand that whatever Xi Jing Ping says is not the will of a single peson as is the case in the US for instance, but the loudspeaker of very profound trends and strategic choices of the entire Chinese Communist party, the body of 94 million people that governs the Middle Kingdom.
Strategic choices like these are not politically-motivated, in the Western electoral sense of the word, but deep fundamental choices to achieve economic and social progress.
Second, contrary to what US press and financial markets seems to believe, the US system is NOT the ONLY successful social and political system available.
America’s repeated failures in trying to export its model of public Governance – democracy – to other parts of the world over the past decades, from Vietnam or Korea in the 50s and 60s to Iraq and Afghanistan more recently, are here to testify that Western democracy is NOT applicable, as is, to many – if not most – parts of the world that had not had the backbone of education, culture and history of the Western democracies.
The inability of US and Western commentators to understand and accept that the Chinese culture of the supremacy of the collective well-being is radically different, and could be more efficient, than the western infatuation with individual success is concerning.
China’s social, economic and political eco-system has delivered more to the world prosperity than the US Wild West free wheeling capitalism when it comes to lifting people out of poverty, raising living and educational standards and creating an affluent society for all, by creating the world’s largest consumer market.
Dismissing the Chinese economic and social system as a potential failure is a self-centered analytical prism rather than an objective analysis of facts and trends. It is dangerous analysis and mis-judgement going forward, as most of the major economic and social crises of the 20th century all originated from the US and were caused by the unbridled excesses of the individualistic American culture.
Third, and more importantly, Jack MA and all the Chinese billionaires should remember, and are currently being reminded, that their good fortune comes primarily from the combination of two systemic factors :
. They would never have hundreds of millions of clients if the Chinese Government had not crafted an affluent Chinese society for four decades through their careful management of their economy and society,
. They would not be that wealthy if US liquidity and speculation did not propel their companies’ US – listed stocks prices to the dizzying heights they had reached in February 2021.
Indeed, their businesses are thriving and entrepreneurship successful, but negating the effects of the above two systemic factors and positioning themselves as popular stars allowed to criticise the system is arrogant and a dangerous case of biting the hand that has fed you.
These entrepreneurs became rich because of their success, but mainly because of these systemic causes…
And the rise in their wealth and US listed stock prices did not benefit Chinese investors and savers as much as it benefitted US investors, despite originating from China’s economic prowesses.
Ahead of 2022, China is correcting the excesses..
It is forcing companies to list in China and incorporate there… It is creating a new stock market in Beijing to nurture tech innovation and Chinese Intellectual innovation and property.
Tired of seeing outflows of talented technology firms going to rival American public markets like the Nasdaq and NYSE, the Chinese government last week announced the launch of a new innovation focused stock exchange in Beijing.
The market will specifically host smaller innovation firms and by throwing his support behind this initiative, China’s president Xi, is signalling money is available to entrepreneurs! Xi now wants to keep homegrown technology secrets and IP, on the mainland and bolster the next generation of tech firms.
China wants to bring back China’s success to China and avoid the development of a Western Billionaire Stardom culture that is seen as prone to excesses and nefarious for the society at large…
Nothing wrong with that.. Quite the opposite, as this will unleash the next stage of prosperity, a Chinese centred rise in Chinese asset prices, benefitting the Chinese rather than US speculators and hedge funds.
Jack Ma is right to lie low and pledge to donate 15 Billion in the next five years to ” Common Prosperity” rather than entrusting his assets in charitable foundations to avoid paying taxes.
What is at stake here is not whether Ali Baba will stop making money, but how Chinese entrepreneurs behave and deal with their wealth…
Beware of Share Buy Backs…
Within the context of the above debate, a major source of stock market appreciation and individual wealth creation in the US has been the favourable tax treatment of share buybacks, enticing CEO’s to use hard-earned cash to buy back their shares at inflated prices and maximise their personal pay checks.
This may be coming to an end soon….
US Democratic lawmakers are discussing a range of tax proposals targeting corporations and the wealthy including levies on stock buybacks, carbon emissions and executive compensation.
This goes beyond a wider set of measures than President Joe Biden had proposed to help fund a ramp-up in spending on social programs. One idea is applying an excise tax on stock buybacks or treating them as taxable dividends to shareholders, according to people familiar with Senate Finance Committee discussions.
Corporate deductions for executive pay could also be limited ,and chief executive officers could face an excise tax if their pay exceeds that of an average company worker by a certain ratio.
Other proposals are in the mix and have previously been proposed by Biden or by Senate Democrats, including raising the 21% corporate rate, increasing taxes on overseas company income and raising both the top individual income tax rate to 39.6% as well as the capital gains rate for high-income investors.
It is not clear which parts could pass, however, given the views of Senator Joe Manchin of West Virginia, a pivotal Democrat who this week blasted the $3.5 trillion size of the legislation and called for a pause in its consideration given concerns about inflation and debt.
Treating corporate buybacks and dividends similarly for tax purposes by correcting a major loophole in the taxation code, would raise $70 billion to $80 billion a year, “making it a potentially attractive add-on to future budget bills that strive for revenue neutrality or deficit reduction,” law professors Daniel Hemel and Gregg Polsky wrote in a paper earlier this year.
Other measures being considered by Senate Finance Committee Democrats would increase exemptions to Biden’s proposal to impose capital gains taxes on appreciated assets held by wealthy individuals until death.
Democrats have also been discussing a boost to Internal Revenue Service enforcement to raise as much as $200 billion, taxing carried interest for fund managers at regular tax rates, and cracking down on trusts used by the wealthy to avoid gift and estate taxes.
A change in the taxation code regarding Share Buy backs, treating them as taxable dividends, would be a structural game changer in the equation that propelled US equities to such over-valued levels..
Investors should be watching the space carefully…
This could well prove to be the canary in the coal mine or the unexpected Black Swan event of the Biden administration, removing a major source of demand for inflated stocks.
Weekly Market Review
On Friday, the Dow Jones lost 75 points, the S&P 500 edged lower and the Nasdaq was up 0.2% supported by tech stocks after a disappointing NFP number put in question the strength of the economic recovery.
The US economy added only 235’000 jobs in August, well below forecasts of 750’000 as a surge in COVID-19 infections may have discouraged companies from hiring and workers from actively looking for a job. The Fed officials have been pledging to start reducing stimulus this year but weakness in the labour market may delay it.
On the week, the Dow Jones was down 0.2%, the S&P 500 added 0.6% and the Nasdaq gained 1.5%.
Japan was the big winner rising 5.38 % to a new 30-year high after the unexpected resignation of PM Suga. Hong Kong-listed Chinese stocks rose almost 2 % on a strong rebound in bombed out tech stocks.
US Job report disappoints
The US economy added 235K jobs in August of 2021, the lowest in 7 months and well below forecasts of 750K and slowing abruptly from July’s 1.05 million increase, as a surge in COVID-19 infections may have discouraged companies from hiring and workers from actively looking for a job.
Most jobs were created in professional and business services (74K), transportation and warehousing (53K), private education (40K), manufacturing, and other services (37K). Employment in retail trade declined over the month (-29K) mostly because of food and beverage stores (-23K) and building material and garden supply stores (-13K). Employment in leisure and hospitality was unchanged.
US Non-farm employment has risen by 17 million since April 2020 but is down by 5.3 million, or 3.5%, from its pre-pandemic level in February 2020.
US PMI weakens
The ISM Services PMI fell to 61.7 in August of 2021 from a record of 64.1 in July, but beat market forecasts of 61.5. A slowdown was seen for business activity (61.7 vs 64.1 in July), new orders (63.2 vs 63.7) and employment (53.7 vs 53.8) and inventories contracted further (46.9 vs 49.2). At the same time, price pressures eased (75.4 vs 82.3). “There was a pullback in the rate of expansion in the month of August; however, growth remains strong for the services sector. The tight labor market, materials shortages, inflation and logistics issues continue to cause capacity constraints”, says Anthony Nieves, Chair of the ISM.
US Composite PMI Confirmed at 8-Month Low
The IHS Markit US Composite PMI was confirmed at 55.4 in August 2021, down from 59.9 in the previous month, to signal the slowest expansion in private sector output in 2021 to date.
The slower overall upturn stemmed from weaker expansions in the manufacturing and service sectors. Overall new business and employment increased at softer rates, while backlogs of work rose markedly. Meanwhile, Inflationary pressures across the private sector remained elevated midway through the third quarter, as input costs rose substantially and the rate of charge inflation ticked higher.
UAE growth remains robust
The IHS Markit United Arab Emirates PMI edged lower to 53.8 in August 2021 from a two-year high of 54.0 a month earlier, as the economy recovered slowly from COVID-19 restrictions.
New orders rose for the sixth straight month, although the rate of growth eased slightly from July’s recent high; while export sales shrank for the fourth month in a row, due to shipping issues.
Meantime, output went up faster, with employment growing the most since 2018 and backlogs of work accumulating further amid supply-chain pressures. Delivery times improved slightly, the first time since January.
Prices data showed input buying rose for the second month running, with the pace of inflation still one of the quickest in the last three years. Output charges fell for the first time since May, amid efforts from other companies to offer discounts.
Gold at a 2 1/2 Month High
Gold prices rose more than 1.2% to almost $1834 per ounce, a 2-1/2 month high supported by a weaker dollar after the disappointing payrolls report put in question Fed’s pledge to wind down bonds purchases. Sharply negative real rates are supportive of higher Gold Prices.
Crude Oil Fails at holding above $ 70
After initially rising to above $70 a barrel on Friday crude oil fell more than 1% as a weaker dollar and supply disruptions were not enough to outweigh investors’ concerns about the pace of economic recovery. Roughly 1.7 million barrels per day of oil production remain shut in the Gulf of Mexico, after Hurricane Ida damaged offshore platforms and EIA data showed US crude inventories fell for a 4th straight period. Still, on a week, crude gained 0.8%.
European Stocks Lose momentum
The CAC 40 closed 1.1% lower at 6,690 on Friday afternoon trades, in line with its European peers, after market participants digested disappointing labor market data from the US and a batch of PMI figures.
Heavyweight French luxury stocks LVMH (-1.9%), Hermes (-1.3%), and Kering (-1.8%), weighed down on the main Paris stock index amid concerns about slowing growth in the key Chinese market.
The French service PMI eased to 56.3 in August, a decimal point lower than flash estimates had predicted, as businesses said the government mandated health pass for customers had adverse effects on consumption.
On the corporate side, EDF Renouvelables, a subsidiary of France’s utility giant EDF, announced a 15-year electricity supply contract for 300 megawatts of solar energy in the US. Meanwhile, glass manufacturer Saint-Gobain acquired a Dutch company specialised in designing flowmeters. On a weekly basis, the index finished 0.1% lower.
Spain’s IBEX 35 finished 1.3% lower at 8,864 on Friday, with almost all sectors closing in the red, after a closely watched US jobs report showed the world’s largest economy added much fewer jobs than expected, which could influence the direction of the Fed’s monetary policy. The American economy added just 235K positions in August, well below forecasts of 750K and slowing abruptly from July’s 1.05 million increase. At the same time, investors digested the latest services PMI survey from Spain. The country’s business activity grew less than expected in August, slowing further from June’s record high but remaining strong overall. For the week, the IBEX 35 lost 0.7%.
The UK’S FTSE 100 fell 0.4% to close at 7,138 at the end of a volatile session on Friday, after the weak payroll data from the US. Meanwhile, PMI data released in the morning showed the UK private sector economy expanded by the least in six months, while business activity growth rates in the Eurozone and the US also slowed. Also, concerns about the pace of global growth mounted after a report showed China’s service sector contracted sharply in August. For the week, the FTSE 100 lost 0.1%
Italy’s FTSE MIB turned 0.6% lower and closed at 26,065 on Friday, in a bearish session for European markets. Among Italian securities, oil stocks ENI, Saipem, and Tenaris traded in the red tracking losses in crude futures, while luxury stock Moncler fell to the bottom of the index, under pressure from slowing growth signs in the key Chinese market. Meanwhile, digital payments company Nexi also fell on news that the Italian antitrust watchdog opened an investigation into the acquisition of Italian competitor, Sia. On the data front, the Italian private sector expanded at the strongest pace since June 2006, according to the latest composite PMI reading, with services experiencing the steepest growth in 14 years. The index capped weekly gains at 0.1%.
Central bank meetings in the Eurozone, Australia, Canada, Malaysia and Russia will be in the spotlight next week, with all eyes turning to the ECB’s debate over whether it should start reducing its massive PEPP asset purchase program amid brighter prospects for the bloc’s economic outlook. Pressure is building form the Netherlands and Germany to taper quickly as Euorpe’s inflation numbers are worrying.
Elsewhere, key data to watch for include US producer prices and job openings; Canada employment figures; UK monthly GDP; Japan and Eurozone final Q2 GDP data; Germany factory orders; and China inflation data and foreign trade.
MODEL PORTFOLIO 4th August 2021
Mechelany Advisors MODEL PORTFOLIO was up +2.54 % last week
for a Year to date performance of + 50.98 %,
a cumulative performance of +360.79 % since inception on Jan 1 2014,
and a compounded IRR of +22.32 over almost 8 years of management
Last week’s performance was actually held back sharply by the 25 % WEEKLY rise in ETHEREUMS, where we hold an almost 10 % short position.
Unfortunately, our Stop Loss failed to be executed for technical reasons on the breakout last week and we decided to keep the short for now as we are probably making a significant lower top.
We are clearly watching the position very closely and will not allow it to affect our global performance.
Last week, we took profits in most of our Short commodities positions and benefitted from the sharp rise in Silver and Gold, even if our decision to privilege Gold miners did not pay as much as we would have expected for now.
Europe was Neutral as fully hedged and Commerzbank is now looking very favourable.
Japan was our big comeback, and we built our exposure to 11 % of the portfolio for the first time in many months on a major breakout of the Nikkei 225 that triggered our BUY stops in the Index and in four individual stocks, KOMATSU, NOMURA, and two pharmaceuticals OTSUKA and SUMITOMO DAI NIPPON. Japan was a good contributor last week and the Nikkei 225 ended at a 30 years- high, en route to climb back to its 1989 all-time high before the end of the year. The resignation of PM Suga opens the way for more stimulative policies in an economy that is slowing down dure to the spreading of the Delta Variant.
China was very beneficial, with our decision to accumulate Chinese tech stocks in the downdraft paying handsomely and some of long time deep value stocks shaking out of their past lethargy. KUAISHOU TECHNOLOGIEs rose by 24 %, ALI HEALTH and JD HEALTH rose by double digits as did our favorites CHINA RAILWAYS, CHINA MERCHANT PORTS and CHINA COMMUNICATION CONSTRUCTION.
We took partial profits in ALI HEALTH and closed our profitable opposition in TCOM in the US. IQIY rose 9 % as well, marking a long lasting bottom.
On the long side, we added LUZHO LIAOBAO, the distributor of Red Bull in China for a trade.
Our Emirati position were flat on the week, consolidation their previous advances.
Once again, our US short positions were a negative contributor, we got stopped out and then took advantage of the loss of momentum and record high in NETFLIX to re-instate most of them.
Cryptos were the real bad ones with speculators trying to push Bitcoins above 50’000 and ETHERS adding 25 % on the week. We are now at crucial levels., Nothing has chaged in the fundamentals and we are either going to make new all-time highs, or mark a significant lower top…
We have also been helped by the rise in the EURO last week.
Looking Ahead, we see weakness into September/ October before a last rally takes the global indexes higher for the year end and the very beginning of 2022 as per our long established scenario of a MAJOR SECULAR TOP in Q1 2022.
Investors should watch the coming batch of inflation figures and bonds are at a critical juncture,
The lobbying of democrats for a taxation of share buybacks could be a gamechanger for the US stock market and its over inflated mega-caps, and the accumulation of law suits and anti trust actions is putting clouds on the horizon.
Mechelany Advisors’ CHINA DEEP VALUE
Mechelany Advisors’ CHINA DEEP VALUE PORTFOLIO is up + 1.46 % last week,
for a YEAR TO DATE Performance of +23.32 %, outperforming every equity index in the universe save for Swedish equities,
and delivering +36.79 % more than the Chinese HSCEI Index to which it belongs.
The portfolio is not leveraged and offers an 8.46 % gross dividend yield based on expected dividends. It has already cashed in almost 8 % dividends for 2021.
In august we arbitraged China Power International after a 78 % rise and added New China Life.
As highlighted in our CHINESE STOICKS READY TO FLY article posted last week, some of our holdings are ready to start a major appreciation phase.
Last week, China Communication, China Railways and China Merchant Ports all delivered double digits increases and our only negative position was China Telecom after its IPO in Shanghai.
EXANE MA CHINA DEEP VALUE LEVERAGED TRACKER.
ISIN CH 0568524083
Investors can invest in the Mechelany Advisors CHINA DEEP VALUE Portfolio through the EXANE Leveraged tracker which invests in a portfolio of 8 Deep value stocks in China, offering almost 16 % gross dividend yields, of which 8 % have already been paid out off the first six months holding period.
The EXANE certificate MA CHINA DEEP VALUE added + 2.12 % last week after having detached an 8 % dividend for the period up to August 31st 2021.
Since Launch, on February 9th 2021, the EXANE c certificate is up +20.45 %, which considering the 8 % dividend paid aout, amounts to a +28.45 % return in 6 months.
Mechelany Advisors’ CHINA BANKS LEVERAGED
Mechelany Advisors’ CHINA BANKS Leveraged Portfolio is up + 4.24 % on the week and since inception on August 4t 2021. The portfolio invests in 6 Chinese banks and uses a leverage of 1 to 1, enabling it to deliver a 15.89 % gross dividend yield based on expected dividends, while capturing all the upside of the extremely cheap Chinese banking sector.
The portfolio is static by nature and outperformed all its benchmarks last week.
EFG Tracker on the Mechelany Advisors’ CHINA BANKS
ISIN CH 1124141263
Investors can gain exposure to the Mechelany Advisors’ CHUNA BANKS Portfolio through the following EFG Tracker that offers an 11 % yield net of all taxes and fees in US dollars
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