Market outlook: "Internal Cycle" as China's Future Growth Direction
Since Chinese President Xi Jinping put forward the "Internal Cycle" campaign in May, it has gradually become the hottest recent topic in China and has stirred China's economic development in a new direction. The core of the "Internal Cycle" is to focus on connecting all links of production, distribution, circulation, and consumption, which in turn promotes a new pattern of economic development with internal demand. As the epidemic interrupted foreign production along with the gradual blockade of China by foreign countries, China must adapt to the “Internal Cycle” development strategy. In other words, the growth of domestic demand is the only way for a major economic country to move forward from secondary industrial sectors to tertiary industrial sectors.
The “Internal Cycle” replaces imports with a focus on domestic demand. By improving the efficiency of production, circulation, and distribution, and a shift of focus on the people's livelihood, the dependence on foreign imports will be diminished. The United States has high domestic demand, with its domestic consumption accounting for nearly 70% of its GDP. Meanwhile, China's middle-class population exceeds 400 million, surpassing the total population of the United States. Therefore, there is a huge opportunity for China to promote economic growth by boosting domestic demand. Such domestic demand sectors that we are bullish on includes liquor (Kweichow Moutai: 600519.CH), online e-commerce (Alibaba: 9988.HK), physical retail (Anta Sports: 2020.HK). Kweichow Moutai, as the largest national liquor brand in China, has consistently ranked first in the domestic wine industry and the global wine industry in profitability, and has a bright future under the internal circulation; Alibaba, as the largest e-commerce in the mainland, directly benefitted from internal consumer demand stimulation; Anta Sports, as the largest manufacturer and retailer of sports goods in the Mainland, the concept of sports can arouse people's enthusiasm for using domestic products.
Market outlook: TikTok's overseas version is banned by the U.S.
As Sino-American tension continues to tighten, the United States has further banned related Chinese enterprises in an attempt to suppress China's rise on the world stage, both politically and economically. Over the weekend, P.O.T.U.S. Donald Trump said that he would not rule out banning the overseas version of TikTok as it transfers U.S. user data to China. Certain U.S. media reported that Microsoft (MSFT.US) will negotiate an acquisition agreement with ByteDance, the parent company of TikTok, for the acquisition of TikTok's U.S., Canadian, Australian and New Zealand businesses. Microsoft emphasized that it will ensure all private data of TikTok users in the United States will be transferred and stored in the U.S., with data backed up outside of the United States deleted from foreign servers after being transferred back to the states. At the same time, Microsoft may also invite other U.S. investors to participate in the acquisition.
TikTok (Overseas) has 800 million active users worldwide and has more than 2 billion downloads in the Apple and Google app stores, with a valuation of US$100 billion. Microsoft's cash level has exceeded 130 billion U.S. dollars until the first quarter of 2020. Even so, it is impossible for Microsoft to mobilize nearly 80% of its cash to acquire a mobile application. Therefore, cash and new stock payments have become the most likely potential solutions. This way, TikTok may become one of Microsoft's major shareholders, helping Microsoft develop new businesses beyond the cloud. Microsoft is developing a new social advertising business through the acquisition of TikTok (Overseas), meaning a huge potential for business growth. Investors can buy Microsoft ahead of the ByteDance listing to seize the potential upside opportunity.
Market outlook: U.S. dollar index continues to weaken
U.S. President Trump proposed last week to postpone the U.S. presidential election in November. At the same time, the U.S. economy suffered the worst recession since 1940 in the second quarter, with the COVID-19 epidemic still severe in parts of the U.S., the market’s bearish sentiment on the dollar continues to increase. The U.S. dollar index fell by more than 4% in July, with monthly decline hitting the highest level in about 10 years, and the U.S. Federal Reserve Chairman Jerome Powell continuing to opt for dovish policies without considering interest rate raise.
The United States’ own economic issues and the Sino-American tension have benefited the performance of euro. Although some European economic data are still weak, the euro still rose last week. The market’s positive expectations for the recovery of the euro zone have led to the continued strength of the euro.
We believe the U.S. dollar index will continue to fall while testing 92, it will fluctuate in a narrow range between 92 and 94. This prediction is based on the fact that the United States has not been able to deal with the domestic epidemic well internally, while wrestling with China externally. Under this uncertain macro environment, investors are more inclined to swap their funds to hold gold, euros and yen to avoid the political risks. We also do not rule out the Fed's potential implementation of negative interest rates, an attempt to save the economy through monetary policies, that might become a catalyst for the further weakening of the U.S. dollar. Therefore, we continue to be optimistic about gold. On one hand, we can hedge against macroeconomic risks, and on the other hand we can hedge against the weakness of the US dollar. Therefore we recommend buying GLD.US (an ETF tracking gold price) call options. Exercise price of 205 USD maturing in 6 months cost 2.7% premium. With this , investors potentially participate in the upside of gold with the loss capped at the premium paid.
San Miguel beers are brewed by San Miguel Winery in the Philippines. It is the earliest brewery in Southeast Asia established by the Spanish back in 1890. San Miguel is one of the largest and most diversified conglomerates in the Philippines by revenues and total assets, with a local market share of over 80%. Its sales are equivalent to approximately 5.5% of the Philippine GDP in 2019. It is one of the country’s largest generator of direct and indirect jobs, with approximately 44,024 regular employees as of December 2019. San Miguel is of the top three beer brands in Asia, with an annual production of more than 2 billion liters, and a business scope with more than 100 plants that has expanded from the Philippines to Hong Kong, as well as more than 70 countries including Mainland China, Indonesia, and Vietnam… etc. San Miguel Corporation was once the only beer brewery in Hong Kong, it had dominated the Hong Kong market for a long time since 1948, its market share even reached 90% in 1990. In 2025, if the company does not redeem its bond, its interest will step up to 10.237% over prevailing treasury yields. The current price is at 100.00, with yield to worst at 5.5%.
*Please noted that product prices are indicative only subject to refresh before trade, the prices change subject to market conditions.
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