Daily China: Chinese Stimulus Vs. A Weak Australian Housing Market and more

In this briefing:

1. Chinese Stimulus Vs. A Weak Australian Housing Market
2. Debt Ratios Do Matter
3. The Community
4. U.S. Equity Strategy: Defensive Areas Weakening; Broad Market Attempting to Bottom
5. Differing Sino-US Agendas Undermine Global Growth Outlook

1. Chinese Stimulus Vs. A Weak Australian Housing Market

The multipronged stimulus policy announcement in China appears significant and should help Chinese investor and economic confidence recover.  The market is probably braced for weaker Chinese December activity reports next week and should look forward with some increased confidence in Chinese equities.  This is likely to contribute to a firmer outlook for the EUR that has suffered from a slump in its industrial activity that appears to reflect weaker demand from China.  The AUD has been highly correlated with Chinese equities in the last year, and it may also respond positively to prospects for some recovery in China.  However, its upside may be hampered by the increasing concern over more rapidly falling house prices in Australia, weaker construction activity and fears that households may have slowed spending.  RBA rate cut expectations have increased and Australian rates have lagged the recent rebound in US rates.

2. Debt Ratios Do Matter

Monetary diarrhoea has inflated the debt structure.

The death of the Bretton Woods monetary system in 1971 paved the way for unbridled money printing. The resulting Great Inflation inflicted huge negative real returns on bondholders and stockholders until 1982. Thereafter, many countries, especially EMs, linked their exchange rates to the dollar, resulting in the fastest ever-growth in global foreign exchange reserves. In addition, central bank puts and then extraordinary fiscal and monetary policies turned it into the most virulent asset bubble in history, despite monetary mayhem, exemplified by numerous banking crises and three big stock market drawdowns. 

3. The Community

Luckin Coffee could be looking to IPO. lululemon raises Q4 guidance. WeWork rebrands to The We Company.

• Starbucks: Luckin Coffee could start to flash red on the radar screen for investors in Starbucks as it is apparently looking to IPO on the Hong Kong Stock Exchange.
• Apparel, Accessories & Luxury Goods: As evidence of how vertically integrated, high-margin retailers like apparel, accessories & luxury goods companies with social missions are uniquely positioned to originate value, lululemon just raised its Q4 guidance on strong holiday sales momentum.
• WeWork: Proving our controversial thesis that WeWork is more of a human capital play than a real estate play, it is re-branding to The We Company.

In yesterday’s research report, I posed the controversial question, “Could Starbucks’ Beans Start to Lose Their Magic?”, expressing my concern that Starbucks’ beanstalk could start to wilt with Schultz no longer around to cultivate his high-fidelity community-based social mission to “inspire and nurture the human spirit—one person, one cup and one neighborhood at a time”, which brings the real magic to its beans. The key emerging risk is that Starbucks faces a highly aggressive disruptive entrant, Luckin Coffee, which could start to flash red on investors’ radar screens as it is apparently looking to IPO on the Hong Kong Stock Exchange. Interestingly, in 1998, 11 years after Howard Schultz planted the magic beans for his Starbucks movement, another community-based social mission took root, with Chip Wilson starting his lululemon movement to “create components for people to live a longer, healthier, and more fun life”. Although Chip Wilson was forced out of his company in early 2015, which he recounts in his new tell-all book, “Little Black Stretchy Pants”, the cult-like following he built is bearing real fruit as lululemon is able to leverage it to build DTC distribution channels and the company just raised its Q4 guidance. And 11 years later, in 2009, Adam Neumann and Miguel McKelvey put together the pitch deck for “The we brand companies”, planting the seeds for their WeWork movement, inspired by their community-based social mission to empower people to “Make a Life. Not Just a Living.” A decade later, guided by their original vision, they have re-branded WeWork to The We Company, signaling their intent for global domination as they advance beyond office leasing.

4. U.S. Equity Strategy: Defensive Areas Weakening; Broad Market Attempting to Bottom

In this report we detail our U.S. investment thesis and provide a detailed technical appraisal of the broad market, as well as highlighting attractive investment opportunities within each of our 12 Sectors.

5. Differing Sino-US Agendas Undermine Global Growth Outlook

The fate of the global economy in 2019 will hinge on the willingness of China and the US to combat decelerating domestic growth via invoking appropriate policy support.

Given current fiscal backdrops, both China and the US have less capacity to ease policy to boost growth compared to the available monetary measures at their disposal.

Pressure is increasing on Beijing to aggressively cut taxes in March to stimulate growth, as well as structurally boosting consumption.

China’s consumers have become increasingly more discerning in their attitude towards foreign brands, partly due to the rise of credible local competitors.

The current economic and financial environment is somewhat reminiscent of 2016 when a deal between the Fed and China averted protracted economic and financial turbulence, but the current China-US nexus makes an accord in 2019 extremely unlikely.

China is unlikely to act again as buyer of last resort for the world economy courtesy of another credit binge, but policy will instead focus on stabilising growth at 6.0%-6.5%.