David Fuller and Eoin Treacy's Comment of the Day
Category - China

    Premiumization is the ultimate Challenge

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

    Amidst a macro slowdown, Chinese consumer upgrades continued in 1H15, illustrated by the sustainable outperformance of high-end beer, high-quality infant formula, natural water, new premium beverages, high-end diapers, etc. This favours foreign brands, and we view premiumization as the most challenging trend for local brands.

    1H15 review: volumes down, prices up, input costs down
    In 1H15, the combined revenue/NPAT of HK-listed FMCG stocks under DB coverage (ex-meat) were down 4%/up 2% yoy, largely as volumes were down, prices were up and input costs were down. In the midst of the macro slowdown we saw premiumization, continuous channel destocking and channel shifts. After the completion of destocking, the revenue/NPAT of the major A-share baijiu companies rose 5%/3% in 1H15, Nestle (NESN VX, Hold) recorded mid-single-digit growth in 2Q15, and Unilever (ULVR LN, Buy) returned to modest growth in 1H15 in China. Premium foreign infant milk formula, high-end diapers and beer continued to outperform.

    2H15 outlook: de-stocking to ease, yet no signs of macro bottoming out 
    After 12 months of channel destocking, we expect pressure to ease in 2H15, while the input cost inflation risk remains low. However, headwinds from the macro slowdown and channel shifts remain strong. Longer term, we think the most challenging trend for local brands is premiumization (both branding and product), as foreign brands are more experienced.

     

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    Email of the day on the upcoming Fed decision

    It would appear that the Fed might have a tough decision to make on Sep 16-17 – to hike or not?  Perhaps “not” due to the shaky ground of the current China stock market and the repeated pressure from the IMF & ECB not to raise the rates? 

    But hypothetically, let’s assume that the Fed will really decide to hike the rates, even with a clear statement on slow increase of rates. In such a scenario, considering that China is the biggest holder of US Treasuries, would you expect China to start unloading/selling their positions immediately?, especially if they still need to further tighten their money market in order to shore/support their ailing stock market. 

    Also in the interest of other subscribers, your view would be appreciated.  

     

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    China Just Killed the World's Biggest Stock-Index Futures Market

    This article by  Kyoungwha Kim for Bloomberg may be of interest to subscribers. Here is a section: 

    China, which has been investigating evidence of “malicious” short selling since July, stepped up curbs in the futures markets on Monday. The China Financial Futures Exchange now labels a position of more than 10 contracts on a single index future as “abnormal trading.” While the bourse said the restriction won’t apply to futures used for hedging purposes, it didn’t detail how it will identify such trades. Before last month, investors could have as many as 600 contracts.

    The bourse also raised fees for settling positions opened on the same day to 0.23 percent from 0.0115 percent. Margin requirements on stock-index futures contracts were lifted to 40 percent from 30 percent. For those with hedging demand, the levels climbed to 20 percent from 10 percent. Exchange officials didn’t respond to e-mailed questions from Bloomberg News on Tuesday.

    Futures trading on the CSI 300 Index, a gauge of the nation’s biggest companies, shrank to just 27,899 contracts on Wednesday. That’s down from 3.2 million at the end of June and compares with the 30-day average of 1.7 million. For the CSI 500 Index of small-cap shares, volumes have dropped to 11,820 from about 144,000 a month ago.

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    Email of the day on how to buy the Hang Seng

    Thank you for your excellent service, it’s so nice to hear a calm voice every morning these volatile days! I have a short question? I want to buy Hang Seng index, there must be some with a large discount today???? All the best. A subscriber for 27 years!!!!

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    Email of the day on potential for a change to the Hong Kong Dollar Peg

    I have posted a query twice on the future of the HKD in your “subscriber's forum” but I never seen any response so far ?  so I reiterate my question ...

    With Hong Kong being closely linked to China's economy and financials, could it be possible that the HKD be unpegged to the USD, or have the peg revised downward ?  And this, for one part due to the uncertainty of predicting the magnitude of the continuing CNY devaluation, and on the other part due to the expected FED raising the interest rate either in Sep or later this year, or early next year ?

    Your valuable view as usual would be always appreciated .

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    Mobius to Beijing: Quit Fighting the Market and Let Stocks Fall

    This article by  Kyoungwha Kim, Cindy Wang and Kana Nishizawa for Bloomberg may be of interest to subscribers. Here is a section:

    “I’d expect the government to be reducing intervention,” Mobius, the Franklin Resources Inc. money manager who’s been investing in emerging markets for more than four decades, said in an interview in Hong Kong on Friday. “They realize it’s not working.”

    Authorities may be more receptive to declining share prices now that the country’s World War II victory parade -- seen as a platform for President Xi Jinping to project China’s strength on the world stage -- has passed without incident. Mainland exchanges, shut since Sept. 2 for national holidays to celebrate the war anniversary, reopened today facing a range of indicators that suggest investors see more declines.

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    Email of the day on Chinese consumers

    This is entertaining but the most worrying report that I’ve read about China’s economy.  Could the situation have changed so much since your visit? 

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    Email of the day the onshore/offshore Renminbi rate

    Ambrose Evans-Pritchard in his superb piece in the DT today designates the offshore/onshore Yuan rate as the key canary in the coal mine for further financial stress. Where can we find / how can we follow the offshore/onshore Yuan rate in the chart library?   


     

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    Email of the day on China and market complexion

    The following article, seeking to explain China's recent missteps in handling its domestic stock market, is quite interesting: And congratulations on writing some excellent (& cool-headed) analysis this week

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