Wall Street Breakfast: China Crackdown Continues

Sep. 13, 2021 6:32 AM ETBABA, NTES, MCHI, EEM, KWEB, AAPL, BTC-USD, ETH-USD, PFE, BNTX, DVAX, NXPI, NFLX, VALN70 Comments
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China crackdown continues

Chinese regulators continue to apply pressure on the country's biggest tech companies, this time reportedly looking to split up Alibaba (NYSE:BABA) founder Jack Ma's Alipay. Beijing is pushing for Alipay to create a separate app for its loan business.

Chinese stocks are coming off a choppy week where the worries about government crackdowns were exacerbated, not least by the vagaries of the actions. Gaming stocks Tencent (OTCPK:TCEHY) and NetEase (NASDAQ:NTES) faced the brunt of the focus the last couple of weeks as Beijing imposed restrictions on online gaming hours for children. Last week, the stocks dropped sharply on a report from the South China Morning Post that regulators were halting approval of online games, only to bounce back some after the paper later clarified the government is just slowing approvals for now.

Leader Xi Jinping is making these moves to address social inequality and "avoid an existential threat from an outsider of the Chinese Communist Party" that could challenge the hierarchy, Thanos Papasavvas, CIO at ABP Invest, said on Bloomberg TV earlier this month.

Christopher Wood, global head of equities strategy at Jefferies, says that the moves simply look like Beijing wanting its gaming limit of three hours per week enforced, but that the market reaction shows increasing nervousness in the sector.

"The problem remains that for many foreign equity investors, given the structuring of their portfolios, the internet sector is the private sector in China for all practical purposes," Wood writes in his latest "GREED & fear" note. (Emphasis added.)

"In this respect, the issue remains that foreign investors’ recent experience in Chinese equities is very different from investors in the mainland market," he says. "This is because the portfolios of growth orientated foreign investors have traditionally been most exposed, in GREED & fear’s view, to the three sectors most at risk of continuing regulation. That is internet, education and healthcare."

Tech makes up 38.7% of the MSCI China Index (NASDAQ:MCHI) and 13.6% of the MSCI Emerging Markets Index (NYSEARCA:EEM).

Retail fervor: While the sector is mostly driven by institutional money, "there is also evidence of late of bargain hunting on the part of American retail investors," looking at the KraneShares CSI China Internet ETF (NYSEARCA:KWEB), tracking the CSI China Overseas Internet Index. "While the ETF’s price has declined by 50% from the peak reached in mid-February, its shares outstanding and market capitalization are up 222% and 64% over the same period to 149m shares and US$7.9bn respectively," Wood says.

The problem with passive: As big companies get bigger, their outsize influence on indexes could become a vulnerability. "The Chinese regulatory campaign against the internet sector, in terms of changing the rules of the game, is also a salutary reminder that the ultimate problem with passive investing, otherwise known as investor socialism, is that everybody owns the same thing; a trend further exacerbated by the boom in investing in index tracking ETFs," Wood asserts. And the problem isn't confined to China.

"With the six Big Tech stocks now accounting for 24.7% of the S&P500 market capitalization, the risks are obvious if Washington ever summons the backbone to actually do something about Big Tech as opposed to just talking about it," he adds. The "new head of the Federal Trade Commission, Lina Khan, clearly wants to do something about. But it is quite another question whether she will be allowed to." (1 comment)

iPhone launch

Apple (NASDAQ:AAPL) will host a "California streaming" launch event on September 14 at 10 a.m. PDT and is expected to debut the so-called iPhone 13 lineup, handsets that follow the launch of the first 5G iPhones last year and the resulting supercycle.

The event will be the "biggest day of the year for hardware," said Loup Ventures analyst Gene Munster in a research note released last week. Munster expects a second launch day in October, with the new models announced at both events "accounting for about 40-50% of the company's revenue over the next 12 months."

"From an investor’s standpoint, the trajectory of the iPhone business over the next year has less to do about specs and pricing, and more to do with the age of the phone," wrote Munster. "Last year, we estimated the pool of iPhones three years or older to be 420M. That base will drive iPhone revenue growth in FY21 of about 40%, compared to a typical year of low single-digit growth."

Wall Street is looking for 5% growth and 260 million units for next year, though Munster sees potential upside to that growth rate due to the pool of about 400 million iPhones that are three years or older. (48 comments)

Optimism on financials

Jefferies equity strategists map out their reasons for going bullish on Financials. With the U.S. yield curve steepening in the past two months and the U.S. breakeven curve flattening from deep inversion, "the market is beginning to recognize that both tapering and the rate cycle are appearing on the horizon," write the strategists led by Global Equity Strategist Sean Darby.

U.S. bank stocks have been treading water during that time as forward earnings revisions have been stable. And before the Delta variant, surveys were indicating a shift to a lending cycle from an impairment phase, they noted. (19 comments)

Bitcoin to $100K?

The recent eye-catching rally seen in Bitcoin (BTC-USD), which started at $30K level at the end of July, could just be the beginning of an even larger surge to $100K, with Ethereum (ETH-USD) potentially reaching $5K, as both cryptos face increasing demand and diminishing supply, according to the Bloomberg Crypto Outlook, dubbed Onward and Upward. Ether leads Bitcoin on a month-to-month basis, outperforming BTC by almost three-fold year over year.

Bloomberg's report said Bitcoin "is well on its way to becoming the digital reserve asset in a world going that way," but keep in mind that in order for a world reserve currency to function as "money", it must perform as a medium of exchange, unit of account, and a store of value. (100 comments)

Pfizer child vaccine

Amid surging Delta variant cases in the U.S., COVID-19 vaccines for children ages 5 to 11 could be available as soon as the end of October, The New York Times reports. The timeline is based on the expectation that Pfizer (NYSE:PFE) - BioNTech (NASDAQ:BNTX) will have enough data from clinical trials to seek emergency use authorization for that age group from FDA towards the end of this month.

Dr. Scott Gottlieb, a former commissioner of the FDA who also sits on the board of Pfizer said that getting the green light for younger children will require careful and expeditious review of the clinical data. (5 comments)

Today's Markets

In Asia, Japan +0.22%. Hong Kong -1.5%. China +0.33%. India -0.27%.
In Europe, at midday, London +0.55%. Paris +0.55%. Frankfurt +0.84%.
Futures at 6:20, Dow +0.55%. S&P +0.48%. Nasdaq +0.4%. Crude +0.43% at $70.61. Gold -0.04% at $1791.45. Bitcoin -2.7% at $44631.
Ten-year Treasury Yield -7 bps to 1.334%

Today's Economic Calendar

2:00 PM Treasury Statement

Companies reporting earnings today »

What else is happening...

Dynavax (NASDAQ:DVAX) under pressure after U.K. ends COVID-19 vaccine deal with collaborator Valneva (VALN).

NXP Semiconductors (NASDAQ:NXPI) picks TCS as a strategic partner to drive IT innovation.

Outer Banks,' 'Vivo' pace Netflix (NASDAQ:NFLX) to another easy streaming ratings win.

Stand fast on Consumer Discretionary, BMO says; REITs still strong.

U.K. to terminate COVID-19 vaccine supply deal with Valneva (VALN).

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