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Why China’s Growth Sometimes Doesn’t Add Up

Beijing is dealing with a new flavor of China-skepticism in the wake of the pandemic and a more aggressive foreign policy. But certain things aren’t new: Foreigners are skeptical of Chinese economic data. The nation’s strong second-quarter growth, reported at 3.2%, has added further fuel to the debate. 

Two other data points, in particular, have been raising eyebrows. China’s so-called fixed-asset investment, which includes investment in new capital goods and things such as land, fell 3.1% year over year in the first half of 2020, according to official figures, while the investment part of gross domestic product rose 1.5%. One factor behind the big discrepancy might be rapidly rising inventories, which aren’t included in the fixed-asset measure but do contribute to overall investment.

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China’s inventories surged during the first half as production outpaced demand: industrial inventories were 4.3% higher in the first five months of 2020 than a year earlier. Moreover, the unusual combination of rapidly rising inventories and rapidly falling prices suggests that “real” growth in inventories was very high indeed.

That jump—companies were destocking in late 2019—might help explain why overall investment held up relatively well. It doesn’t augur well for the future, though, since prices are still falling and companies can’t build inventory forever. Unless Chinese consumers start spending again and businesses start investing in plant and equipment, rather than hoarding goods, 3.2% growth—or perhaps, somewhat less—might be hard to sustain.

8.5% profit on Intel in our upside view

Intel Corp All SessionsEXITIntel Corp All Sessions 20210121 16.47

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Why It Might Be Time to Invest in Non-U.S. Stocks

Foreign stocks have had a rough go of it compared with U.S. stocks over the past decade. That might be about to change.Stocks in foreign developed markets as well as emerging markets have greatly underperformed U.S. shares for years, pushing U.S. stock valuations far above foreign valuations. Even last year, when stocks were strong world-wide, the average U.S.-stock mutual fund or exchange-traded fund rose 28%, outpacing the average international-stock fund’s 23% advance, according to Refinitiv Lipper data. This year, U.S.-stock funds were down 2.1% on average through July and international-stock funds were down 5.5%.

The question is whether valuations, along with shifting global economic fundamentals, make foreign stocks an attractive investment—perhaps finally justifying the long-held advice that U.S. investors keep at least a portion of their portfolios in overseas shares or funds. Many investing professionals say the answer to that question is yes.

In the 10 years through July 31, the S&P 500 returned 13.84% annualized, including dividends. That compares with 5.3%, in dollar terms, for the MSCI World ex-USA Index of developed nations and 3.69%, in dollar terms, for the MSCI Emerging Markets Index.

That has kept U.S. stock valuations at the top of the totem pole. As of July 31, the forward price-earnings ratio, based on earnings estimates for the current fiscal year, totaled 23.84 for the S&P 500, 18.57 for the MSCI World ex-USA Index and 15.84 for the MSCI Emerging Markets Index.

On the economic front, many countries are further along than the U.S. in emerging from coronavirus lockdowns. That has helped put some of their economies in a stronger position than the U.S., many investing pros say. Numerous countries also have adopted successful economic-stimulus plans.

Those perceived economic advantages show up in earnings forecasts. Analysts polled by FactSet predict earnings for companies in the MSCI Emerging Markets Index will fall less than earnings for companies in the U.S. S&P 500 index this year. And emerging-markets earnings are seen rebounding more than U.S. earnings next year.

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Some investment managers are particularly enthusiastic about emerging markets, where stocks already have outperformed their U.S. counterparts over the past three months. The labor pools of emerging-markets countries should grow faster than those of developed nations—providing fuel for economic growth because emerging-markets nations have younger populations than developed countries.

Economic-growth numbers are stronger for important emerging markets, such as China, than for the U.S. The International Monetary Fund estimates that U.S. GDP will contract 8% this year, compared with a 3% contraction, on average, for emerging markets. Next year, the IMF expects a 4.5% rebound in the U.S., compared with a 5.9% bounceback, on average, in emerging markets.

Many investment pros are impressed with the European Union’s ability to craft a €750 billion ($880 billion) fiscal stimulus package, passed last month. In the U.S., by contrast, Democrats and Republicans have been unable to agree on another round of stimulus that most analysts think is needed to buoy the economy.

While the IMF predicts GDP will shrink more in the euro area than in the U.S. this year 10.2% to 8% it sees a bigger recovery for the euro area than for the U.S. next year 6% to 4.5%.

Why Chinese Startups Still Flock to the U.S. for IPOs

The U.S. remains a magnet for initial public offerings of Chinese technology companies, despite rising political, trade and regulatory tensions between the world’s two largest economies.

More than 20 companies from China have gone public so far this year on the Nasdaq Stock Market or New York Stock Exchange, raising $4 billion in total, according to Dealogic data. Most specialize in high-tech industries such as software or electric vehicles. The sum already exceeds the $3.5 billion in combined IPO proceeds that 25 Chinese companies raised in the U.S. over the course of 2019.

Investment bankers and other advisers say Chinese companies are still lining up to go public in the U.S. and have been largely successful at raising funds from U.S. and other global investors. Listing in the world’s largest, most active and deepest capital market brings companies more international name recognition and a more diverse group of investors, they say. Most stocks of Chinese companies have also chalked up significant gains on their U.S. trading debuts.

The recent accounting scandal at Luckin Coffee Inc., a Chinese coffee chain whose shares collapsed less than a year after its May 2019 IPO, for the large part hasn’t deterred U.S. and other global investors, who remain eager to invest in Chinese companies with strong growth potential, say market participants.

Li Auto Inc., a five-year-old electric-vehicle manufacturer, in late July raised $1.1 billion in a Nasdaq initial public offering that was led by units of Goldman Sachs, Morgan Stanley, UBS and China International Capital Corp.

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Some of the largest share sales by Chinese companies this year have taken place in Hong Kong and Shanghai, however, including secondary listings by JD.com Inc. and NetEase Inc., and that of Semiconductor Manufacturing International Corp. which earlier gave up its NYSE listing.

Chinese fintech and payments giant Ant Group Co. is also preparing for a Hong Kong and Shanghai dual listing that could value the company in excess of $200 billion. Ant didn’t consider a U.S. listing even though its sister company Alibaba Group Holding Ltd. went public there, The Wall Street Journal previously reported.

Chinese companies don’t always thrive in U.S. markets, either. In recent years, numerous U.S.-listed Chinese companies have also been taken private, often by management teams working with outside investors, and sometimes with the aim of securing a higher valuation from a more enthusiastic investor base back in China.

Fed’s Low-Rate Strategy Confronts Concerns over Bubbles

Federal Reserve officials’ promises to hold interest rates very low for a long time could pose a dilemma once the pandemic is over: how to deal with the risk of asset bubbles.  The Fed committed to hold short-term rates near zero until inflation reaches 2% and is likely to stay somewhat above that level—something most officials don’t see happening in the next three years.

The new strategy, adopted unanimously by the Fed’s five governors and 12 reserve-bank presidents, alters how the central bank will react to changes in the economy. The Fed is now seeking periods of inflation above its 2% target to compensate for periods like the current one, when inflation is running below that goal and short-term rates are pinned near zero. This means the Fed will effectively abandon its prior approach of raising rates pre-emptively, before inflation reaches 2%.

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To be sure, with millions of Americans displaced from work and loan defaults on the rise, no one at the Fed is worrying that their policies are too easy right now. Rather, the question is about the trade-offs they might face if, after the pandemic has passed, inflation remains slow to rise to their goal of averaging 2%.While Mr. Powell hasn’t ruled out using interest rates to one day address financial bubbles, he has repeatedly played down such prospects. But, as Mr. Powell said in a 2017 speech, this doesn’t mean the same interest rate will achieve those two goals plus a third one: a stable financial system.

4.7% profit on EasyJet PLC in our downside view

easyJet PLC EXIT

EasyJet's chief executive said that he always expected there to be bumps along the way to a travel recovery and denied that a third wave of COVID-19 infections in Europe put it at risk.

easyJet PLC 20210305 16.33

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Office Markets Under Pressure as Coronavirus Squeezes Cities

Urban office markets and other commercial real estate in major cities are experiencing their worst stretch in decades, upended by the pandemic, changes in work behavior and struggling city economies.

Tourism in most cities has slowed to a trickle, business travel and meetings have all but dried up, and retail sales have plummeted as shoppers stay home. Protests against police brutality and systemic racism have also caused nervous storefront owners to keep their properties boarded up. Cities from Chicago to Houston have suffered a jump in homicides and shootings this summer. The combination of these forces have led some property investors to fear an urban malaise not seen since the 1980s, though others contend these fears are overblown and it is too soon to determine whether many companies or young professionals will exit cities once the pandemic eases.

An increasing number of companies are opting to let more employees work remotely. That is a direct blow to office-building owners, as companies look for fewer and shorter leases. But it is a potential hit to big cities, too. Given the prospect of working remotely at home, some city residents have already started looking to move somewhere cheaper and with more space, real-estate agents say. 

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While office buildings won’t close as quickly as restaurants or shops, even a modest drop in office occupancy tends to generate a big drop in profit. That is in part because the cost of paying for heat, electricity and building staff usually stays about the same even when revenue falls.

Not all the news for office owners is bad. Long-term interest rates continue to be low, and real-estate funds are sitting on huge amounts of capital waiting to be spent. Office leases tend to lock tenants in for many years, so it may take a while for revenue to drop. Property owners are also less indebted on average than in past crisis periods, most recently 2008. Commercial property values in major cities also tumbled after the 2008 financial crisis. U.S. commercial real-estate prices fell by 35% between August 2007 and June 2010, according to Real Capital Analytics. Then a steady influx of new companies and well-paid young professionals attracted to the energy, job opportunities and cultural attractions of urban life fueled a surge in property values in the years that followed.

 

3.9% profit on Facebook in our upside view

Facebook Inc EXITFacebook Inc All Sessions 20210312 17.49

Our information/charts are NOT buy/sell recommendations. Are strictly provided for educational purposes only. Trade at your own risk and analysis.
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22.15% profit on Macy in our upside view

Macys EXIT

Macy's jumps after at least two brokerages raise price targets.

Jefferies says Macy's improving purchase orders with vendors are encouraging for co's expected performance in the H2 of 2021; raises  stock to $20 from $18.50, implying an upside of ~17% to stock's last close.Cowen & Co raises Macy by $1 to $17- $4 above stock's median.

Macys Inc 20210302 16.32

Our information/charts are NOT buy/sell recommendations. Are strictly provided for educational purposes only. Trade at your own risk and analysis.
Contact our advisors through website chat 24/7.

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