Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Thematic (Sector/Industry)

Hong kong Financials / Thematic (Sector/Industry)

In these stressed times, risk assets seem excessively buoyed by liquidity again despite what gold, US treasury yields, and the still elevated VIX tell us. The market seems to have given up on earnings and bases a bullish thesis on 2021-22 guesses. We are not, despite what some national media outlets inform us, out of the COVID woods by any means. Are governments throwing in the Health towel before wealth priorities?Those with a thoughtful disposition, based on History, would be forgiven for throwing in the towel on the bear side. Long/Short strategies are looking about as out of favor as value investing. Despite a mega credit bubble, fixed exchange rate and increasing scarcity of foreign exchange perhaps, CSI 300 could rally hard into YE 2020 with a fortified CNH. This is predicated on a weaker dollar which is by no means a certainty. There is talk of a bull market in China and locals are free with their tips. We are told to buy BABA and Tencent ahead of Google and Microsoft on valuation grounds: is that really coherent?So what tempers enthusiasm or even euphoria? In one word: Hong Kong. Well, it used to be a single word until 1926. This note arrives just as the government has had to close down schools.The US continues to flex its muscles regarding China. There is an element of scapegoating for sure, blaming China for its own haphazard and subpar response to COVID. In a sense, China's "illegal" Security Law was a gift from the Gods to Trump and Pompeo. But there is also a hardening bipartisan existential logic too. The US is fed up with IP theft and CCP meddling in internal affairs. (China would say the same thing). Pompeo though is surely right to highlight the goings on in the South China Sea. It is as reprehensible as actions by scores of colonial powers and state sponsored pirates such as the East India Company in days of yore. (Same logic applies to tree-cutting Brazil). And we do live in times of revisionism.Can the US be serious about starving China of dollars? China is most certainly not a "swap line" amigo. Trump will sign into bipartisan law next week the Hong Kong autonomy act. The legislation gives the administration the power to impose sanctions on officials accused of undermining Hong Kong’s semi-autonomous status, as well as banks and state entities that do “significant transactions” with them. This applies to banks, asset managers, and insurance companies. For sure, there will be rigorous KYC exercises at many banks, not just Bank of China and Minsheng, the favourites of the CCP at home. The US sanctions could mean freezing the property of individuals and companies or excluding them from the US financial system. They may stop banks from conducting FX transactions over which the US has jurisdiction: freezing access to dollars. The act could force financial institutions to choose between doing business with the US or China. Hong Kong’s national security law makes it illegal to comply with US sanctions against Hong Kong and China.Trump signed into law a sanctions bill that requires the administration to compile a report on China’s mass internment of millions of Muslim Uighurs and identify Chinese government officials to impose sanctions on. The Treasury said that sanctions apply to Chen Quanguo, the Communist party secretary of Xinjiang,  Zhu Hailun, who helps oversee policy in the province, Wang Mingshan, head of the Xinjiang public security bureau, and Huo Liujun, a former head of the bureau.Things are certainly complicated by the hiring of Luo Huining as the CCP's enforcer in Hong Kong: referred to by Kyle Bass as "the butcher of Tibet". Mr Bass like many before him has his money where his mouth is and its safe to say that he is not long.Bluff and buster is the response from financiers in Hong Kong. Things will muddle along. While the UK government hardens its stance on Huawei, Standard Chartered and HSBC have openly supported the Security Law. Without Hong Kong and China business, both entities are left rudderless. But the "Five Eyes" security alliance and parts of the EU appear to be taking a stance in the playground of global geopolitics and China's soft power shortcomings may bring many parts of Asia into the gang. Belt and Road as well as excursions into Africa and LATAM have raised many deep concerns about arrangements though local politicos are only too happy to oblige and do business with the hegemonistic CCP.Amid the euphoria for Chinese assets, we note a creeping weakness in Hong Kong financials and in HSBC and Standard Chartered. We would avoid both entities. In fact, we do not like the risk-reward in Hong Kong. Prior to the China-US spat, ensuing trade/tech/capital war, and local protests, Hong Kong financials were looking over exposed to the property market while trends continue to erode as measured by our PH Score.Chinese State Banks might be some of the safest in the world. They might be. This does not make them the best investments as shareholder interests are of course secondary to CCP directives. they do not hesitate, when called upon, to bail out a province if required.We take a look at <a href="https://www.smartkarma.com/entities/dah-sing-banking-group-ltd" target="_blank" data-smartkarma-citation="entities:342:1" rel="noopener">Dah Sing Banking (2356 HK)</a> where trends are subpar and CRE exposure remains elevated by system standards.

In these stressed times, risk assets seem excessively buoyed by liquidity again despite what gold, US treasury yields, and the still elevated VIX tell us. The market seems to have given up on earnings and bases a bullish thesis on 2021-22 guesses. We are not, despite what some national media outlets inform us, out of the COVID woods by any means. Are governments throwing in the Health towel before wealth priorities?Those with a thoughtful disposition, based on History, would be forgiven for throwing in the towel on the bear side. Long/Short strategies are looking about as out of favor as value investing. Despite a mega credit bubble, fixed exchange rate and increasing scarcity of foreign exchange perhaps, CSI 300 could rally hard into YE 2020 with a fortified CNH. This is predicated on a weaker dollar which is by no means a certainty. There is talk of a bull market in China and locals are free with their tips. We are told to buy BABA and Tencent ahead of Google and Microsoft on valuation grounds: is that really coherent?So what tempers enthusiasm or even euphoria? In one word: Hong Kong. Well, it used to be a single word until 1926. This note arrives just as the government has had to close down schools.The US continues to flex its muscles regarding China. There is an element of scapegoating for sure, blaming China for its own haphazard and subpar response to COVID. In a sense, China's "illegal" Security Law was a gift from the Gods to Trump and Pompeo. But there is also a hardening bipartisan existential logic too. The US is fed up with IP theft and CCP meddling in internal affairs. (China would say the same thing). Pompeo though is surely right to highlight the goings on in the South China Sea. It is as reprehensible as actions by scores of colonial powers and state sponsored pirates such as the East India Company in days of yore. (Same logic applies to tree-cutting Brazil). And we do live in times of revisionism.Can the US be serious about starving China of dollars? China is most certainly not a "swap line" amigo. Trump will sign into bipartisan law next week the Hong Kong autonomy act. The legislation gives the administration the power to impose sanctions on officials accused of undermining Hong Kong’s semi-autonomous status, as well as banks and state entities that do “significant transactions” with them. This applies to banks, asset managers, and insurance companies. For sure, there will be rigorous KYC exercises at many banks, not just Bank of China and Minsheng, the favourites of the CCP at home.   The US sanctions could mean freezing the property of individuals and companies or excluding them from the US financial system. They may stop banks from conducting FX transactions over which the US has jurisdiction: freezing access to dollars. The act could force financial institutions to choose between doing business with the US or China. Hong Kong’s national security law makes it illegal to comply with US sanctions against Hong Kong and China.Trump signed into law a sanctions bill that requires the administration to compile a report on China’s mass internment of millions of Muslim Uighurs and identify Chinese government officials to impose sanctions on. The Treasury said that sanctions apply to Chen Quanguo, the Communist party secretary of Xinjiang,  Zhu Hailun, who helps oversee policy in the province, Wang Mingshan, head of the Xinjiang public security bureau, and Huo Liujun, a former head of the bureau.Things are certainly complicated by the hiring of Luo Huining as the CCP's enforcer in Hong Kong: referred to by Kyle Bass as "the butcher of Tibet". Mr Bass like many before him has his money where his mouth is and its safe to say that he is not long.Bluff and buster is the response from financiers in Hong Kong. Things will muddle along. While the UK government hardens its stance on Huawei, Standard Chartered and HSBC have openly supported the Security Law. Without Hong Kong and China business, both entities are left rudderless. But the "Five Eyes" security alliance and parts of the EU appear to be taking a stance in the playground of global geopolitics and China's soft power shortcomings may bring many parts of Asia into the gang. Belt and Road as well as excursions into Africa and LATAM have raised many deep concerns about arrangements though local politicos are only too happy to oblige and do business with the hegemonistic CCP.Amid the euphoria for Chinese assets, we note a creeping weakness in Hong Kong financials and in HSBC and Standard Chartered. We would avoid both entities. In fact, we do not like the risk-reward in Hong Kong. Prior to the China-US spat, ensuing trade/tech/capital war, and local protests, Hong Kong financials were looking over exposed to the property market while trends continue to erode as measured by our PH Score.Chinese State Banks might be some of the safest in the world. They might be. This does not make them the best investments as shareholder interests are of course secondary to CCP directives. they do not hesitate, when called upon, to bail out a province if required.We take a look at Dah Sing Banking (2356 HK) where trends are subpar and CRE exposure remains elevated by system standards.

Hong Kong Financials: Bluff and Bluster? Taxi Driver Tip Time in China?