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The FSA Spy market buzz – 19 June 2020

Gambling fund; Bubble spotting; Beijing’s tax breaks; Fraud at Wirecard and Sichuan Trust; HSBC cutting jobs; New fund house rumours; Life returns in Singapore and much more...

Spy was due to meet a usually reliable asset allocator for a drink this week, which was cancelled at short notice, leaving Spy without a partner in crime to enjoy gin and tonics. Instead, Spy went home and reread some of the predictions made for 2020 by various fund houses for a laugh. In all fairness to JP Morgan Asset Management, though, Spy would like to borrow their crystal ball: “The economic map for 2020 is far from clear… but overall global growth is likely to remain constrained by geopolitical uncertainty. Central banks are likely to remain a key pillar of market support, given their demonstrated willingness to push deeper into uncharted policy territory to keep the expansion going.  We expect the focus on sustainability to continue to grow, with potential regulatory and policy responses having wide-ranging investment implications.” Pretty much sums it up so far, doesn’t it? Now, what about H2?

There is something faintly ironic about the new ETF Spy spotted this week. Cynics have been decrying the fact that Wall Street has become more of a casino than ever before with central banks playing such an outsize role in markets these days and a flood of new ‘mom and pop’ investors buying stocks with enthusiasm, blind to all fundamentals. With that in mind, the Roundhill Sports Betting & iGaming ETF, which invests in online gambling and gaming companies, may seem a rather unnecessary edition. Why not just buy the S&P 500 tracker, wonders Spy, with a wry smirk? The fund is global and among its thirty constituents includes such exciting-sounding equities as DraftKings, Kambi and Flutter. Spy would imagine wealth management ESG committees will run a country mile, but those frustrated they have not been able to travel to Vegas or Macau may find the theme appealing if the Nasdaq and Hang Seng have not been enough of a thrill.

Spy has been hunting around for easy-to-understand evidence, flashing signs one might say, that we are in some sort of equity bubble. Instinctively, things feel frothier than a coffee snob’s cappuccino in the markets and utterly disconnected from reality. Spy presents as evidence, for those who care about such things, Exhibit A. This week, Berkshire Hathaway, the sprawling conglomerate and investment fund had a market cap of about of $440bn. That is equalled by the combined market caps of growth darlings Shopify, Square, Spotify, Zoom and Tesla. So what, you ask? Well, Berkshire earned in the last 12 months 297x as much income as those five firms combined: more than $10bn versus a paltry $33m. But people just don’t want to know about value…

Beijing may have been making soothing sounds about wanting to keep Hong Kong as its international financial hub, but it is now doing its very best to lure asset managers to be based in the city itself. On Tuesday, Beijing slashed taxes for asset managers who set up and run firms from the capital. The tax breaks are in line with mutual fund best practise, as far as Spy can tell, ensuring that profits derived from stock trading within funds will not attract any business income tax and bond income will be exempted from VAT. At first glance, this seems like a competitive decision against Shanghai more than Hong Kong. However, Spy applauds any effort to make doing the business of asset management in China easier.

It does not surprise Spy, one tiny bit, that several dodgy dealings are coming to light. That is what happens at the end of bubbles, or when the tide goes out, as a famous man put it. This week, the team at Wirecard suddenly discovered that they were missing about €2bn ($2.24bn) in hard cash. How on earth that had been missed to date is a source of much debate. Rumours had swirled before that something was not right, but Wirecard defended itself like an injured gazelle on the African plains surrounded by lions. The fraud has already snared one renowned fund picker, Alexander Darwall, who made his name running Jupiter’s European Opportunities Trust and recently set up his firm, Devon Equity Management. Wirecard was his largest holding. The bad luck has a touch of Neil Woodford about it. Alexander must feel a touch aggrieved.

Meanwhile, closer to home, in China, investors are discovering that some financial institutions have a habit of selling risky products that don’t always give you your money back and the crowd is not happy. The Sichuan Trust Company, a type of investment management company, has a lot of grumpy investors when it admitted this week that more than $3.5bn of their hard-earned money is at risk because shareholders seem to have embezzled the cash and a so-called “trust of trusts” investment is currently unable to pay its agreed interest and principal back in its entirety. Nearly one-third of all Chinese trust companies have been fined in the last 12 months for using investor funds inappropriately, according to Caixin. As predictable as this sad tale is, it represents a great opportunity for well-run investments firms going onshore to treat customers fairly and honestly.

So HSBC is going ahead with 35,000 job losses. Looking around the world, the list of companies reducing jobs and not just furloughing people is growing. Supposedly (and thankfully) Asia will be hit more lightly by HSBC’s decision but proof will be in the pudding. Spy thinks, for what it is worth, before the end of the summer, a great deal more firms will have discovered that they don’t need quite so many people as before. That will apply to office space too as reduced headcounts and WFH reconfigures life. Getting one of those A grade, Central offices, may indeed be viable again…

Spy has heard a few little rumours of new fund houses setting up in Asia. Two US-headquartered firms currently have feelers out for office space in Singapore and are hiring some business development managers. When more reliable information is available, Spy will be sure to share the news.

There must be a touch of happiness in Singapore today. Lockdown is being lifted for restaurants and sports. Spy understands the Chope booking service has been overwhelmed as people can finally eat out again. Glimmers of normal life returning. At last.

Until next week…

Part of the Mark Allen Group.