8 July 2019 Issue 816
Global Market Commentary
- US: US economic data is strong. The US Department of Labor announced that the number of non-agricultural employment jobs in the United States increased by 224,000 in June, far exceeding the market expectation of an increase of 160,000. For the entire week, the Dow rose by 1.21% to 26,922.12. The S&P 500 index rose by 1.65% to 2,990.41. The Nasdaq rose by 1.94% to 8,161.79 points.
- Europe: The General Director of the International Monetary Fund (IMF), Christine Lagarde, will become the president of the European Central Bank. Besides, China and the United States decided to restart the trade consultations, which is beneficial towards the investment atmosphere. Over the week, the UK’s FTSE 100 index rose by 1.72%, the German DAX index rose by 1.37%, and the French CAC40 index rose by 0.99%. The STOXX 600 index rose by 1.36% to 390.11 points.
- Asia: China and the United States restart trade talks, and the market expects the Federal Reserve will cut interest rates. Over the week, the Nikkei 225 index rose by 2.21% to 21,746.38 points. The MSCI Asia Pacific Index rose by 1.02% to 161.68 points.
- US: The US employment report for June was ideal, with 224,000 new jobs in non-agriculture industry, far exceeding the market expectations of 160,000. Market believes that the probability for Fed to cut interest rate by 0.5% at the end of July becomes lower. For the whole week, the yield on the US 10-year government bond rose by 3 basis points to 2.033%.
- Europe: IMF President Christine Lagarde will take over as ECB President, the market expected that she may launch a new round of easing policy or interest rate cuts. For the whole week, the German 10-year bond yield fell by 4 basis points to -0.365%.
- Oil: The situation in Iran is tense, and the Organization of Petroleum Exporting Countries and its allies have extended the agreement to cut oil production, pushing up oil prices. Over the week, New York oil futures fell by 1.64% to close at $57.51 a barrel.
- US dollar: The US employment report for June is ideal, causing the probability of interest rate cuts fall. For the whole week, the Dollar Index rose by 1.203% to 97.286.
- China: The US employment report for June was ideal, the US dollar index rose, and the yuan fell against US$1. For the whole week, the yuan fell 0.100% against the US dollar at 6.876.
- US: White House economic adviser Kudlow said on Friday that trade representative Wright Heze and finance minister Mnuchin have communicated with Liu He through phone. The US and China will hold face-to-face consultations in the near future, but there is still no timetable on that.
- US: The number of new non-agricultural employment jobs in the United States reached 224,000 in June, much higher than the median estimate of 160,000 by economists. Strong employment data has weakened the reason for the Fed to cut interest rates.
- U.S: The Fed will issue a semi-annual monetary policy report to Congress, reaffirming that it would hold an open attitude towards interest rate cuts, while noting that economic growth has slowed in the second quarter.
- Euro-zone: According to informed sources, the EU government is actively discussing the nomination of Bank of England Governor Carney as the new president of the International Monetary Fund.
- Euro-zone: Boris Johnson, the popular candidate for the next prime minister of the United Kingdom, said that fulfilling the Brexit decision will be the key to maintaining unity in Britain.
- Euro-zone: European Central Bank Management Committee, Olli Rehn, said that the slowdown of the euro zone’s economic growth should no longer be seen as a temporary phenomenon, and the central bank should be prepared for the possibility of a worsening situation.
- Japan: Japanese Prime Minister Shinzo Abe said that there is no need to raise the sales tax to more than 10% in the next 10 years, as this may hinder the government’s efforts to rectify the state’s fiscal position.
- Japan: The Japanese Ministry of Finance announced that Japan’s current account surplus in May narrowed by 15.8% year-on-year, to only 1594.8 billion yen, but still higher than the market expected surplus of 1,385 billion yen.
- Singapore: Nikkei/Markit data showed that Singapore’s June Purchasing Managers’ Index (PMI) fell back from 52.1, a five-month high, to 50.6.
|China Market Commentary|
|• China’s foreign exchange reserves rose for the second consecutive month in June, rising to the highest level since April 2018, boosted by potential capital inflows and positive valuation effects.
• Zhou Liang, Vice Chairman of China Banking Regulatory Commission, claimed that all business of Baoshang Bank has returned to normal, and the small and medium-sized financial institutions have been running smoothly. In the first half of 2019, new RMB loans were more than 9 trillion yuan. The current non-performing loan ratio of the banking industry is stable at around 2%.
Will Sci-Tech Innovation Board be a catalyst for re-rating of China stock market?
The long-awaited first batch of IPOs on the Shanghai Stock Exchange (SSE) STAR Market (a.k.a. the Science and Technology Innovation Board) is expected to be listed within this month. As of 2 July, 141 IPO applications have proceeded to the inquiry process of the STAR Market, among which 18 companies have been approved to get registered at the securities regulator and five have been granted the green light for listing. These five companies are Raytron Technology Co., Suzhou TZTEK Technology Co., Suzhou HYC Technology Co., Zhejiang Hangke Technology and Montage Technology Co., which have received underwhelming response to raise a combined RMB6.8 billion from investors, about 50% more than initially planned amid strong market enthusiasm. Besides, the IPO prices equals to about 40-79x of their historical earnings, implying over 100% valuation premium over existing A shares. According to PWC China forecasts, there could be more than hundreds of IPOs to be listed on STAR market in 2019.
Figure 1. Underwhelming response for the first batch of IPOs in STAR
Source: Bloomberg, Noble Apex/iFund
An important milestone of China capital market reform
Despite general investors are keen on how much of gain they can generate from the first day of IPOs launch, the STAR Market itself actually could be seen as a testing ground for a number of long discussed equity-market-related reform measures in the China equity market. For example, one of the major breakthroughs of STAR is that it will allow good companies with no earnings, or have yet to recoup earlier losses, to list. This is much looser than the A-share main boards, which requires aggregate earnings of RMB30 million or more over the last 3 years. With lower earnings requirement, STAR actually opens up the funding avenues for capital-seeking technology starts-up.
Another critical change for the STAR market is that the IPO pricing will be changed to market-based, i.e., according to market supply/demand book-building process, while the implicit 23x P/E valuation cap will also be removed. Under the new measures, the IPO pricing will be more reflective of the company’s trailing fundamentals, being less “undervalued” and would be more inline with the general market environment. The new measure should also help to avoid excessively high over-subscription ratios as well as usually strong post-IPO debut performance (even for companies with poor fundamentals).
The third meaningful change for STAR is that the listing process of the IPOs will be shifted to registration-based from approval based (i.e., implicit endorsement by authorities). Under the registration-based system, the issuance of IPOs is expected to be less cyclical, more transparent and with shorter lead time than the existing method. Companies that fulfill the listing requirements will be eligible to float the shares, despite the veto power has shifted to the exchange operator from the CSRC, which is more consistent with the HK and US approach. Besides, the new measures should give a more pivotal role to brokers and investment bankers, potentially enhancing the revenue of these professionals.
Other key reforms includes: multiple share classes and variable interest entity (VIE) structures are allowed; no price limit apply in the first five days after listing, while from the sixth day, shares have a +/-20% daily limit and can trade after-hours (vs. +/-10% daily limit for most A-shares now); higher investors requirement (own Rmb500k or more of stocks on average in past 20 trading days plus two years or more of trading experience, while those with assets under Rmb500k can participate through mutual funds).
Another Nasdaq for China
In a nutshell, the establishment of STAR market is undoubtedly making a big step forward of capital market reform in China. It could become another Nasdaq for Chinese companies, and may eventually to become a US$2 trillion market per Goldman Sachs forecasts. On the other hand, STAR is strategically important as China needs to have a more market-driven platform for companies, especially tech and bio-tech companies, to raise their funding over the long-term, and we can expect the R&D intensity in China will further accelerate after the setup of STAR. Overall, today is just a beginning of more reforms for capital market in China. The success of STAR should help to attract more foreign capital and may become a catalyst for re-rating the China stock markets in the medium term.