Morning Note: Market news, Our View on China, and a Merger at Fidelity China Special Situations.
Market News
US equity markets were little changed last night – S&P 500 (-0.2%); Nasdaq (-0.1%) – with retailers and electronic payments firms in focus after Black Friday/Cyber Monday. This morning in Asia, markets were mixed: Nikkei 225 (-0.1%); Hang Seng (-1.0%); Shanghai Composite (+0.2%). The FTSE 100 is currently trading 0.3% lower at 7,437.
US Treasuries extended their recent rally – the 10-year currently yields 4.38%. Some traders are starting betting on large Fed rate cuts next year, with one wagering on as much as a 250-bp reduction. The trade, using SOFR options, will start to pay off if the Fed lowers its benchmark rate to about 3% by September next year. That’d be a much more aggressive move than envisioned by the swaps market, where investors are pricing in around 95 bps of cuts during 2024.
Inflation in UK shops fell to a 17-month low of 4.3% this month, the British Retail Consortium said. But looking ahead, higher property taxes and an increase in the minimum wage may push costs back up. Sterling trades at $1.2611 and €1.1532.
Oil edge higher to $80.50 a barrel after a string of losses. HSBC sees a very low chance of deeper supply cuts from OPEC+. Gold moved up to $2,013 an ounce.
Barclays is exploring a plan to drop more than 2,500 investment banking clients as part of an overhaul intended to boost profits and cut £1bn of costs, the FT reported. The bank is expected to focus on ending ties with the least profitable of its approximately 10,000 clients.
Source: Bloomberg
Macro View – China
At Patronus Partners, we believe the evolution of foreign policy under Donald Trump saw the US take a backward step in its commitment to global institutions and a hardening of attitude towards China. Whilst the Biden administration is seeking to re-engage globally, its attitude towards China is equally hawkish.
China is the upcoming challenger to US dominance as the sole global superpower. Its One-belt-one-road initiative that seeks to increase connectivity, cooperation, and trade across the Eurasian land mass is a highly visible example of this. In recent history, China has employed a mercantilist and highly successful growth policy. However, the increasing focus by the US administration on the bi-lateral trade imbalance is motivating China to change its behaviour. Firstly, it is looking for alternatives to US Treasuries to invest its surplus income from trade, such as real and strategic assets. Secondly, it is reducing the dependency on the US dollar to settle important imports such as energy by launching an oil futures contract settled in Chinese yuan. As China tries to grow into a role befitting of its size and importance on the global scale, it has the potential to create major disruptions to the established world order.
While the arrival of the Biden Administration in Washington offered a natural opportunity to reset the relationship on a more positive footing, we think the US has given up trying to bring China into its sphere of influence and has resolved itself to enter and prevail in what it has termed a “Great Power Competition”. The recent meeting between Biden and Xi in San Francisco has been widely reported as being “productive”. It is likely that a détente suits both parties at this juncture. From Xi’s perspective he has significant domestic economic issues to deal with, not least the stresses in the property sector. Biden has falling poll ratings and an election to fight in less than 12 months.
There are times when geopolitics are benign and don’t have large influences on asset prices; this is not one of those times. However, the very nature of a great power conflict is that like the cold war, it plays out over a long period and its intensity ebbs and flows. The sanctions, posturing, and strategic power plays will continue as part of a trend that is still firmly in place. However, it feels like both leaders were very keen to get a message out that they can at the very least “play nicely” when it is in both their short-term interests to do so.
Fund News – Fidelity China Special Situations
Fidelity China Special Situations (FCSS) has this morning agreed heads of terms with the Board of abrdn China Investment Company Limited (ACIC) in respect of a proposed combination of ACIC with the company.
FCSS is a UK-listed closed-ended investment trust which aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities issued by companies listed in China or Hong Kong, and Chinese companies listed elsewhere. The fund has been managed by the highly regarded Dale Nichols since 2014.
Following implementation of the proposals, which are anticipated to become effective by the end of the first quarter of 2024, the enlarged FCSS will continue to be managed, in accordance with its existing investment objective and policy, by FIL Investment Management (Hong Kong) Limited with Dale Nicholls continuing as the named portfolio manager.
The Board believes the proposals will have several benefits for FCSS shareholders, including:
· scale and enhanced profile: the enlarged FCSS is expected to have net assets of £1.2bn (as at 28 November). As the flagship UK closed ended vehicle for investment in China and a constituent of the FTSE 250 Index, it is expected that the enlarged FCSS would benefit from enhanced profile and marketability.
· enhanced liquidity: the scale of the enlarged FCSS, as the largest and most liquid company in the sector, is expected to further improve secondary market liquidity for the company’s shareholders (including in relation to its share buyback policy).
· Shareholder register: the implementation of the proposals would allow a number of shareholders to consolidate their holdings across FCSS and ACIC whilst also creating a more diversified shareholder base through a combination of the two share registers.
· lower ongoing charges: the enlarged FCSS would be expected to benefit from a lower ongoing expense ratio with the company’s fixed costs being spread over a larger asset base.
· contribution to costs: the company’s alternative investment fund manager, FIL Investment Services (UK) Limited, is willing to make a material cost contribution in respect of the proposals, which is expected to offset the direct transaction costs for FCSS shareholders.
· lower tiered management fee: Fidelity has agreed that, with effect from the admission to listing and trading of the New FCSS Shares, the base management fee payable by the company under the investment management agreement will be reduced to 0.65% (vs 0.70% currently) in respect of the company’s net assets in excess of £1.5bn.
The Board operates a formal discount control policy whereby it seeks to maintain the discount in single digits in normal market conditions and will repurchase shares with the objective of stabilising the share price discount within a single-digit range. During the year, the discount currently sits at around 10%.
Source: Bloomberg