☀️☕️ China: No more youth unemployment (data)

📊 Also: US Retail boom, Cava pops, EY EY Oh!; Ruble rubble, Argy Bargy; EV rocketship, SEA Dives 🎓 Private Equity

Aug 15, 2023

📈 Market Roundup 16-August-2023

US large-cap S&P 500 closed 1.16% DOWN 🔻

Tech-heavy Nasdaq Composite closed 1.14% DOWN 🔻

Pan European STOXX Europe 600 closed 0.95% DOWN 🔻

HK/China's Hang Seng Index closed 1.03% DOWN 🔻

Japan's broad TOPIX closed 0.41% UP ▲

📝 Focus

China: No more youth unemployment (data)

📊 In the Markets

US Retail boom, Cava pops, EY EY Oh!
Ruble rubble, Argy Bargy
EV rocketship, SEA Dives

📖 MoneyFitt Explains

🎓 Private Equity

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📝 Focus

China: No more youth unemployment (data)

With the economy facing mounting challenges as weak data on retail sales, industrial output and investment growth roll in, Beijing responded by unexpectedly cutting key interest rates to bolster activity, rattling Asian and global markets. And bundled in at the same time, it decided to suspend the release of youth unemployment figures, having hit a record 21.3% in June, a victim of China's economic slowdown and rapidly fading post-zero-Covid rebound. The National Bureau of Statistics (NBS) stated that age group-specific unemployment data would no longer be released, citing the need to improve labour force survey statistics. The move also coincided with the release of weak economic indicators for July, including a growth rate of 2.5% year-on-year in retail sales, down from 3.1% in June. With overall unemployment at 5.3% in July and industrial production growth at just 3.7%, China faces massive challenges in achieving its official 5% growth target for the year.

..... ▷ Last month, a Chinese economics professor claimed in an article in Caixin, a respected Beijing-based financial news organisation, that the country's youth jobless rate could have reached almost 50% in March compared to official data of 19.7%. This sparked a fierce debate about the soft labour market and also, by implication, official data accuracy. Professor Zhang Dandan from Peking University estimated it could have been as high as 46.5% if 16 million non-students "lying flat" at home or relying on their parents were included. Already, anyone who works a bare minimum of 1 hour a week qualifies as employed. The official youth jobless rate further rose to a record 21.3% in June (and the article has since been taken down.)

Youth of today, lying flat.
- Image credit: Lilo and Stitch (2002) / Walt Disney Pictures via Tenor

..... ▷ China's economy has struggled to stabilise since the pandemic, with weakness or stiffer regulation in sectors like manufacturing, tutoring, property and online platform sectors disproportionately affecting younger workers and the well-educated. Longer term, the nation's transition from less of a debt-driven, construction, investment and export-based economy to one more balanced by domestic consumers and services should, in theory, work in favour of younger workers, though progress on that path remains uncertain, particularly as China faces what may turn out to be an extended bout of deflation.

..... ▷ Nearer term, investors are worried about worsening consumer sentiment and, increasingly, potentially disastrous contagion effects from missed payments on shadow banking trust products from the $3 trillion trust sector's massive exposure to real estate developers. In particular, Zhongrong International Trust's recent missed payments have sparked fears of a cascade of further trust product defaults. Trust firms operate in China's shadow banking sector, outside many of the rules governing commercial banks, and unlike most asset management companies elsewhere, they generally just channel the money invested by individuals and companies in wealth products sold by banks straight to real estate developers as well as borrowers and individuals in other sectors.

📊 In the Markets

On Good-is-Bad Wall Street, stocks hit a five-week low as robust consumer spending data showing a resilient economy stoked concerns of prolonged higher US interest rates. Longer-term US Treasury yields continued their rise to reach a 2023 high, with the 10-year now at 4.22%. Bank shares also fell after Fitch considered downgrading multiple bank ratings (a week after Moody's did the same on midsize lenders) and talk of sweeping changes to regulations tightening oversight of the banking system following the collapse of several lenders in March, even though the contagion proved to be limited. Among them are the FDIC's depressing plans for new "living wills" for large regional banks, basically detailed plans on how to wind up their businesses should they fail. As concerns grow over China's stalling economic recovery amid weak July data and its surprise (read: panicked?) decision to lower its lending facility rate, the UK's FTSE 100 followed Asian markets down. Other than Japan, that is, where second quarter GDP grew at a 6% annual rate, twice as fast as expected, on strong exports and strong tourist receipts despite still weak domestic consumption.

..... ▷ Retail boom: Despite high interest rates, US retail sales growth in July rose 0.7% vs the 0.4% experts were expecting as online shopping and dining out increased, though spending on big-ticket items like furniture and cars fell. This suggests ongoing economic growth in Q3 but also that interest rates will likely remain high given still above-target inflation. This depressed markets, even though a "soft landing" that traders are pricing in (i.e. a drop in inflation without the usual collapse in economic growth and a surge in unemployment) remains on the cards. Spending was helped by lower-income households spending saved pandemic funds (hardly a bottomless resource.)

..... ▷ Cava pops: Meanwhile, recent IPO Mediterranean-themed restaurant chain Cava stunned Wall Street's Finest by hitting profitability in its first earnings report as a listed company, making 23 cents of earnings per share (EPS) compared to a 2 cent per share expected loss.

..... ▷ EY EY Oh! And private equity🎓 giant TPG Capital has approached EY about buying a stake in its consulting arm just months after the deal to split it from the audit business fell apart amid infighting, shocking nobody, over money and control. The consulting business would then be listed on the stock market, potential with an enterprise value (market capitalisation PLUS the debt of the company) of about $100bn. Accenture (ACN), with double the revenues, has a market cap of about $200bn.

..... ▷ Probably the best... Carlsberg of Denmark reported like-for-like revenue growth for the first half of 11%, with sales volumes up 0.8%, in contrast with volume declines at chief competitors ABInbev, hit by Bud Light controversies, and Heineken, which had no particular excuse. Carlsberg raised its operating profit growth forecast from a range of -2 to 5% to 4 to 7%.

Danish beer drinking
- Image credit: carlsberg via Tenor

Panicking Submerging Emerging Markets (Russia and Argentina edition)

..... ▷ Ruble rubble: Russia's central bank responded to public calls from the Kremlin by hiking its key interest rate by 3.50%-points to 12% in an emergency move to stem the Russian Ruble's bleed against hard currencies. The currency has been sliding as military spending soars, and with Western sanctions hitting trade balances, foreign reserves tank (no pun intended.)

..... ▷ Argy Bargy: On the other side of the world, Argentina on Monday hiked interest rates to 118% and devalued the artificially controlled official (and slightly meaningless) exchange rate by 18% after the shock primary election win by an unorthodox right-wing outsider. Prices in shops rose by 10-25% immediately, and by Tuesday, facing monthly inflation of 14-16% and economic collapse, the country was facing pressure to devalue again, with the black market "blue dollar" rate diving to half the new official rate. There is a chance - though small, given that it's Argentina - that Argentines are ready for deep and painful free-market reforms, and an incoming government could use that to slash the bloated bureaucracy and welfare state, halt uncontrolled money-printing by the central bank and free up businesses.

If only we could find somebody to lead Argentina to live up to its potential
- Image credit: Tenor

South East Asians in NY: Vinfast and SEA

..... ▷ EV rocketship: Vietnamese electric vehicle start-up VinFast surged on its opening day on Nasdaq after a SPAC entry, closing at $37.06 on Tuesday, miles above the $10 valuation for the merger. That puts it at a market capitalisation (share price X number of shares) of $85bn, making it the world’s fifth most valuable automaker, bigger than the likes of Mercedes, BMW, VW and Honda, never mind Detroit’s “Big Three” carmakers. Some models are designed with help from the likes of Pininfarina and BMW. Pinch of salt for the pricing: VinFast, officially HQ-ed in Singapore, is 99% held by billionaire founder Phạm Nhật Vượng’s Vingroup, Vietnam’s largest private conglomerate. Phạm got his start selling ramen in Ukraine in 1993.

Like a rocket (on Nasdaq, anyway)
- Image credit: Thai Nguyen on Unsplash

..... ▷ SEA Dives: Heading the other direction, and also Singapore-based, Tencent-backed tech group SEA Ltd sank 29% on Tuesday after reporting revenue just slightly below analyst forecasts, but signalling an end to a cost-cutting drive that began last year to “ramp up our investments” in e-commerce. The shares closed 88% off its high point in late 2021 though still about 3X from its 2017 IPO price. SEA operates three core businesses across digital entertainment/gaming, e-commerce, as well as digital payments and financial services, known as Garena, Shopee and SeaMoney (under various brand names.) Net profits beat market expectations, largely from strong growth from digital financial services (mobile wallet services, payment processing, credit offerings and related digital financial services and products) on top of good paying user growth in its mobile island survivor game Free Fire, offsetting weakness in e-commerce due to marketing cost growth outpacing revenues.

CR7
- Image credit: Shopee / SEA via Tenor

📖 MoneyFitt Explains

🎓 Private Equity

Private Equity (PE) firms operate in a very lucrative part of the financial world, buying and selling companies whether listed on an exchange or not, and full of financial engineering, strategic management, big fees and even bigger egos. Morals are optional.

The super-rich and institutions invest in PE funds as limited partners (LPs) in a fund run by general partners (GPs) from the PE firm. The LPs pay the GPs an annual fee (usually 2%) based on what is invested during the life of the fund (e.g. 7 years) as well as a share of gross profits (usually 20%, known as "carried interest".) These fees can make GPs billionaires.

There are many strategies under the umbrella term “private equity” (most of which include large amounts of debt financing), from mezzanine financing and secondary investing to loan origination and private credit to venture capital and real estate, but the signature, headline-grabbing move is the leveraged buyout, or LBO.

The fund invests in an undervalued company and using connections, management skills and financial engineering, makes it more valuable to sell off at a profit. The fund can give guidance and advice, replace management, change the amount of debt and workers it has or transform the business in any other way.

The company may be listed but then get taken over by the PE firm using loans in a takeover vehicle that end up on the books of the acquired (and merged) company. The sale may be to another company or listed in an IPO. (In "Asset Stripping" by PE corporate raiders, the company can cease to exist as it gets loaded with debt, axes workers and has its assets sold off at a profit.)

Blackstone, Carlyle, Texas Pacific (TPG), KKR, Thoma Bravo, Apollo and CVC are among the largest players.