The US Dollar Weakens

At the beginning of the virus pandemic, in March, we commented on “The Virtual World” in terms of on-line work, on-line study, even on-line dating. The last 5 months of the virus lockdown have (like a war) accelerated both economic and social trends. This is clearly mirrored in the outperformance of the “FANGS” (plus Tesla) in the US market, and of the “BATS” (Baidu, Alibaba, Tencent, plus others in healthcare) in the Chinese market.

There will be a lot of “creative destruction” in old line businesses – for instance the lamentable bankruptcy of Brooks Brothers in the retail space. In fact, physical retail has shrunk dramatically everywhere. Marks and Spencer, among other UK retail chains, has laid off 30% of their staff. In Hong Kong, demand for office space has sharply contracted.

So what does this mean for employment? Nearly 30 million Americans were made unemployed in March and April. Now it is estimated that 17 million are still unemployed (as at July 31st), especially workers in hotels and restaurants, airlines, etc., still on furlough; but many more around the world will lose their jobs. They will have to re-train, with new skills, in an on-line world.

What of the millions of students coming out of college in these next few years? The job opportunities have dramatically diminished. Robots will also increasingly perform the manufacturing work previously executed in Asia. The demand for labour contracts, but salaries should increase. The share of capital and labour in corporate profits will shift in favour of the employees.

It is especially the case in the 18 to 34-year-old bracket that layoffs have been very severe. This will affect consumer and investor behaviour for some time to come. Savings rates are climbing again.

What does all this mean for investors? The US dollar is weakening for several reasons: a growing perception that Trump will lose to Biden on November 4th, that the US has handled the virus badly, and that the government finances and deficit have rapidly weakened. The Euro is heading for 1.20 – there is a strong momentum for commodities. Gold has made a new all-time-high at $1930 an ounce, and silver is up 80% this year.

Gold’s new all-time high has a symbolic importance in that it reflects falling confidence in the US dollar and, hence all “fiat” currencies. It is calculated that, based on the expansion of the Fed’s balance sheet to $7 Trillion plus, gold is likely to exceed $5,000/ounce over the next 3 years.

China/US relations are getting worse, but they still need each other. It is actually quite difficult to transfer manufacturing currently done in China, “back home” – though Japan is paying their companies to do just that. We estimate that 80% of US and European companies will remain committed to China.

The Hong Kong situation also deserves some commentary. Whatever our view of political liberalism and human rights, the facts on the ground are these. The majority of Hong Kong people want to get back to work, and China is the source of much employment, through tourism and investment. With a small “second wave” appearing, the Hong Kong economy is still struggling to recover, with the border closed and strict quarantine in place.

The Hong Kong Exchange shares are, however, doing very well, with this week’s announcement of Ant Financial, the Alibaba payments subsidiary, coming to market: and an estimated $1 Trillion in market capitalization is available from Chinese companies relisting their shares in Hong Kong, from New York.

In Southeast Asia, the situation is like Hong Kong. Everyone’s waiting for China. And, unfortunately, until there is a successful vaccine (Oxford University promises in October), nobody is yet willing to travel. Our bet on a swift recovery in Singapore has not yet worked out. Large domestic economies, like Indonesia, are doing better.

India, despite a growing number of virus cases, has had a good month in the market. The $16 Bn. investment in Reliance JIO, by Facebook, Google, Silver Lake, and others, is powerful evidence that it is India, not China, which could be the Emerging Market of the Next Decade, with on-line services in the spotlight. The World Bank estimates online sales, as a percentage of total retail sales, were only 2% in India, versus over 40% for China, and around 14% globally.

Is China really growing at 3%? That is a leading question. With GNP estimates for 2020 coming in from the USA (-9.5% in 2Q), Europe (-10%), and Singapore (-10% in 2Q), it is hard to see how China’s economy (without a major fiscal stimulus), can grow rapidly with much foreign trade and investment. We focus on freight, electricity consumption and retail sales, which have not recovered strongly since the re-opening. There are also small “second wave” outbreaks of the virus in Xinjiang and Dalian. Thus, we have also focused on the healthcare and technology sectors, which continue to do well. TSMC was up 10% in a day, on an anticipated shortage of integrated circuits.

The disconnect between the real economy and the capital markets continues to surprise observers. But the estimated $10 Trillion of liquidity added in the past 3 months by Central Banks to the global financial system, and the growing spread of zero real interest rates, means that we continue to be positive on investing in Asia.

Hong Kong

3 August 2020