“Plans are nothing; planning is everything” — Dwight Eisenhower
“Ultimately, the cloud is the latest example of Schumpeterian creative destruction: creating wealth for those who exploit it; and leading to the demise of those that don’t.” — Joe Weinman
This week we discuss China A-Shares, China’s 2019 budget announcements and share another cloud-based solutions providers as a potential long-idea.
China A-Shares Update
Global equity and fixed income indices provider, MSCI, has decided to quadruple the inclusion factor of China A-Shares in its Emerging Markets Index from 5 to 20 per cent over three phases. The result is the weight of China A-Shares in the index will increase to approximately 3.3 per cent from the current 0.7 per cent, leading to an estimated US dollars 13 billion of passive inflows into the market. While flows from actively managed funds could be as high as US dollars 50 billion dollars according to sell-side estimates.
MSCI, originally intending to increase the weighting of China A-shares in its Emerging Markets Index by May next year, is fast-tracking the increased weighting to be in effect by November this year.
The X-trackers Harvest CSI 300 China A-Shares ETF $ASHR has returned 28.6 per cent year-to-date (as at market close on 1 March 2019) as compared to the S&P 500 Index returning 12.3 per cent during the same period.
The strong performance of the broader Chinese market, particularly following the Chinese New Year, have coincided with a significant increase in daily trading volumes.
A thawing of US and China trade tensions and the rebound in credit growth witnessed in January have provided welcome relief for the Chinese equity markets. Although negative economic surprises may lead to pullbacks in the nearer term, with the increase in the weighting of China A-Shares in the MSCI Emerging Markets Index, we think Chinese equities remain good value for the remainder of 2019.
China: Notable Announcements from the Annual Legislative Session
At the Annual Legislative Session, which kicked-off in Beijing on Tuesday, Premier Li Keqiang announced that the government is targeting GDP growth in the range of 6.0 to 6.5 per cent for 2019, down from the 6.5 per cent guidance maintained over the last two years. Signalling the Chinese leadership’s preference for stability and all but ruling out the possibility of another credit binge of the likes witnessed following the global financial crisis and in 2015/16.
Announced value-added tax cuts came in higher than expectations. The highest VAT bracket, which applies to the manufacturing sector, was cut by 3 percentage points to 13 per cent, providing some welcome relief for industrial business. The VAT bracket applicable to the construction and transportation sectors was cut by 1 per cent to 9 per cent. The lowest bracket remained unchanged at 6 per cent.
To manage its fiscal deficit and balance the reduction in revenues from VAT, total government spending is budgeted to increase 6.5 per cent in 2019, down from the 8.7 per cent increase in 2018. The targeted fiscal deficit is 2.8 per cent, up from 2.6 per cent last year. Premier Li emphasised that China would not resort to a “flood of strong stimulus policies” to drive economic growth. The quota for local government bond issuance, however, is budgeted to increase by Chinese yuan 800 billion, or almost 60 percent, to Chinese yuan 2.15 trillion in 2019, which should support spending on new infrastructure projects and credit growth.
Overall, the announcements seem to reaffirm our view that following a marked slowdown in the first quarter, the economic environment in China should get incrementally better, not worse, over the course of 2019. Fiscal spending, however, is likely to prove more conservative than we had anticipated at the start of year — the Chinese leadership appear unwilling to undo the effort put in to reduce systemic risks in 2018 by meaningfully increasing the flow of credit in the economy. Nonetheless, we believe credit growth, which has been slowing since the first half 2016, has bottomed and should pickup.
A flaw in reading too much into budgetary announcements, however, is that Beijing can always use state-owned enterprises (SOEs) to implement policies through unofficial means. If SOEs are directed to markedly increase capital expenditures and investments, this should have the same result as a significant increase in fiscal spending done by the government. We think the risk to state led capital spending, direct or indirect, is to the upside.
We have been bullish on long-dated Chinese government bonds for some time but now think it time for fixed income investors to tactically close out any long positions they may have.
One More Cloud-Based Solutions Play
At the tail end of last year, Conlin Matthew, Founder and President, bought shares worth more than US dollar 450,000 representing 2.6 per cent of the company, in Fluent Inc. $FLNT.
Fluent is a cloud-based mobile user and data acquisition services providers that creates marketing programs to deliver superior digital advertising experiences for consumers with measurable results for advertisers. The company claims to interact with over 1 million consumers on a daily basis from its “proprietary first-party data asset” consisting of over 190 million opted-in consumer profiles to gather “self-declared” data. This data is used to create targeted advertising solutions on the company’s proprietary digital properties for brands to connect and interact with consumers.
The company in its present form was created through the business combination of the international digital media assets of BlueFocus International Limited, a wholly-owned Hong Kong subsidiary of BlueFocus Communications Group (a publicly traded Chinese Company), and the performance marketing platform of Cogint Inc. $COGT.
The company has a market capitalisation of US dollars 405 million with a free float of 43 per cent of outstanding shares and short interest of 3 per cent of free float.
We are long Fluent Inc. $FLNT with a stop-loss at US dollars 4.50.
This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.