The Ingham Analytics Weekly Letter on Sunday - 8 November 2020

Sunday, 8 November 2020

Welcome to another Ingham Analytics Weekly Letter on Sunday in which we aim, inter alia, to take a step back to see wood for trees, in South Africa and around the world, with a mix of tongue in cheek.

The US presidential elections have provided some humour, and despair - this is as good as it gets in the land of the free and the home of the brave.

Much like the COVID-19 pandemic which has unleashed a multitude of amateur epidemiologists the past weeks have unleashed a similar multitude of know-it-all psephologists on social media, the press and television. Pollsters, who take themselves far too seriously, once again were wide of the mark on the US election - as indeed they were in Britain where not a single poll predicted a storming Conservative victory last December with Labour strongholds falling like dominoes. In England there was a breach of the red wall but in the US no blue wall sweep. Investment banks have been putting out notes advising high net worth clients how to position for this inevitable blue sweep or blue wave.

Of course, COVID-19 has upset everyone's apple cart and has had economic consequences but that did not stop Republicans garnering 5 million more votes than in 2016 and attracting more Latino votes in Florida and Texas. But whoever occupies the White House in January will probably have secured a Pyrrhic-type victory, neither winner nor runner-up, in office but not really in power. 

At least those Democrat loony leftists won't get to build the woke socialist paradise they yearn for. For the time being the US Supreme Court is unlikely to have more than nine justices. Four more years of quarrelsome US politics, during which nothing much of substance is achieved, means steady as it goes for business from this vantage point. Investors prefer certainty even if that certainty implies status quo.

Interestingly, the performance of gold has been largely unaffected by which party controls the White House. Data going back to 1971 when President Nixon severed the direct convertibility of US dollars into gold, returns were 11% on average per year during Democratic presidencies and 10% during Republican presidencies. Gold returns were only slightly higher in the year following a challenging party's win relative to an incumbent party's victory.

Geopolitical uncertainty is elevated and whilst the global pandemic continues to hurt the economy, and consumer demand for jewellery and technology, investment demand, primarily through gold ETFs remains strong. Gold-backed ETFs recorded an 11th consecutive month of net inflows during October, matching the record set in April 2006. Gold features heavily in Chinese investors' portfolios with young investors taking a particular shine to physical gold as an investment, a mindset that may have been strengthened by the COVID-19 pandemic.

Across the pond from America, any reasonable deal between Britain and the EU is a far away as ever. No self-respecting sovereign nation would even consider conceding to the have-cake-and-eat-it demands out of the EU that are as contradictory as they are absurd.

The EU economic situation remains weak with the Continent in relative decline and so going forward in a post pandemic world the US arguably remains best placed of Western countries from a competitive and growth point of view. We see pitifully few stocks of interest to buy and hold on European stock exchanges but there are choices in the US and Asia-Pacific.

Back to China, where the Communist Party must be looking on with jaw-dropping amazement at the political antics in what still claims to be the world's superpower. Of course, they don't need to worry about pesky elections for a popular mandate in China.

The National People's Congress this week indirectly sent a message to Jack Ma, of ecommerce giant Alibaba fame, who runs the show in China. You may be a rich businessman that is tolerated in this bastion of state-sanctioned capitalism, but you must genuflect to the organs of state. In this case the ant was truly squashed.

We put out a note on Alibaba entitled "White-Anted" which dealt with this issue of the nixing of the proposed Ant Group listing in Shanghai and Hong Kong. To our mind this is no bad thing as Ant Group has become a quasi-bank but without the regulatory oversight or capital requirements other financial institutions have in China. Their loan book is truly huge, balances on Ant's lending platform are 2.2 trillion yuan or $330bn - to put that in context it was the size of South Africa's GDP in 2019.

The China Banking and Insurance Regulatory Commission (CBIRC) back on 16 September issued a Notice on Strengthening the Supervision of Micro-credit Companies. It is a little surprising that Alibaba, let alone their advisors, didn't pay closer attention to this as the listing of Ant Group has been in the works for a while. Furthermore, the People's Bank of China and the CBIRC released new regulations on internet loans on 2 November which set out additional rules for the internet lending industry that would affect Ant Group.

The Alibaba note gives you detail on these regulations and the implications but the key take away is that Ant will have to stump up tons more capital, which will impact return on equity, and whilst we think a listing will still go ahead at some point, compliant with Beijing, the rating isn't likely to be as rich. Ant aside we like Alibaba at the right price and it's worth checking out for those of you who are looking for an alternative to overpriced Amazon.

Richemont announced interim results which were impacted negatively by COVID-19. Even posh watches and jewellery aren't immune to this pandemic. What was fascinating though is that sales in China grew by 78% at actual exchange rates (83% constant currency) on strong domestic demand as fewer Chinese travelled abroad due to travel restrictions. Sales in Europe and America were clobbered.

But the takeaway from the Richemont result is that Asia-Pacific was 47% of total sales with China dominating that. It isn't just the Chinese Communist Party who can remind Jack Ma and in fact the incoming US president whose a big boss, but Johann Rupert can also send a signal as to where the commercial centre of gravity has shifted.

This week, Alibaba and Richemont announced a global strategic partnership to provide luxury brands with what they call "enhanced access" to China and to integrate "seamlessly" digital and physical. The Richemont result states that "our joint venture with Alibaba, FENG MAO, has continued to develop favourably" which probably was the precursor to this latest big deal. Alibaba has 757 million customers. Both parties are investing $1.1 billion in this new digitisation venture. 

In "Buckle up?" this week we suggested that the potential for volatility to ratchet up has elevated with Europe and the US the two geographic risk factors - the one COVID-19 related with economic consequences and the other presidential election related, with both political and economic consequences. One can't assume that the final weeks of 2020 will pass off quietly in the global financial markets so at a minimum we suggest being defensive to fight another day.

Alibaba is the big deal for us this week.


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