Posted inFSA Spy

The FSA Spy market buzz – 22 March 2024

AllianzGI on China stewardship, Death of the mutual fund, W’s top financial centres, Schroders on Japan, Swiss cuts and Japanese hikes, Reddit, Book wisdom and more.

This week the World Happiness Report was published and kindly shared with Spy by a glamourous, globe-trotting sustainability expert and loyal reader. What she pointed out, was that not a single Asian country is in the top twenty and that the young are truly miserable. Spy, very happily, read the report while enjoying a particularly fine glass of Montrachet. Apparently, Finland is the happiest country in the world for the seventh year in a row. The last time Spy was in Finland, he can remember sitting in a sauna with far too much vodka and the happiness certainly did flow. What can account for the misery of the young worldwide? Spy’s take, for what it is worth, is that social media must surely be a culprit – if not the exclusive one. Tik Tok, X, Facebook and others, may give young people something to fill the waking hours, but not happily. 

Hat tip to Allianz Global Investors on their latest insight piece which focuses on Chinese equity stewardship – a complex area where government-linked investors may dominate the shareholding. It is worth reading the entire piece in full. The German manager points out that “Foreign investors continue to own only a fraction of China A-shares companies. Over the last five years, China A-shares assets owned by foreign entities have remained below 5% (as a percentage of market capitalisation). Additionally, foreign shareholdings are capped at 30% and some strategically important companies are not accessible to foreign investors.”  This low and capped foreign holding ratio presents challenges to influence local boards. The firm uses creative ways, including pre-AGM discussions to engage with management over any egregious conflicts that have come to light.

Mark Twain quipped, “Reports of my death have been greatly exaggerated.” What would Twain think of the mutual fund structure, which has just turned 100 years old, of whom many in the industry are suggesting its death may be imminent. Fundamentally, the ETF, separately managed accounts, investment trusts and private vehicles are all chipping away at the mutual fund’s dominance. There are still apparently $63bn held inside mutual funds around the world according to Morningstar, as reported by the FT, but the direction of travel is clear: overall, other structures, particularly ETFs are winning the war for flows. And what it boils down to is pricing and costs. ETFs are priced throughout the day versus the rather quaint and old-fashioned daily pricing of mutual funds. That means ETFs are a more suitable trading vehicle than the mutual structure. Moreover, the cost of an ETF is, on average, lower and, for some themes, significantly so. The mutual fund may not actually be dead, but it is surely in the old age home. Don’t be too sad – it has a good run.

It is a bit of a parlour game, reckons Spy, but it has real world implications. Which are the world’s top financial centres as based on the GFCI 35 ranking. See the full list here. New York remains top, with London second. Singapore is currently 3rd – a mere one point ahead of Hong Kong. What caught Spy’s eye, however, was that China has four of the top twenty: Hong Kong, Shanghai, Shenzhen and Beijing. Interestingly, Dubai has just entered the top twenty. With Tokyo and Seoul also on the list, seven of the world’s top financial centres are now in Asia. Victor Li, CK Hutchison and CK Asset chairman, said this week, “There are only a few [international financial centres], and Hong Kong is one of them. It is hard-won. We must not lose this place.” That sentiment is surely shared by ALL ten top players.

Japan’s Nikkei 225 has crossed the 41,000 mark as Japanese inflation accelerated in February. With impeccable timing, Schroders has put out a piece musing on whether there is more growth to come. “Robust corporate fundamentals, improved governance standards and increasing demand from foreign investors have all contributed to the stock market’s robust performance.” But the manager has turned a little cautious, thinks Spy, “There is, perhaps, reason for caution in the near-term, given the speed and nature of the recent rally…. The overall valuation of the market looks reasonable, but this masks a considerable divergence between the larger companies that have become relatively fully priced, and smaller companies where valuations are, in general, much more appealing.” Rather than focusing on the big things in Japan, time for the small?

Yesterday, the Swiss central bank issued a surprise rate cut; in contrast the Bank of Japan hiked. If anyone can remember the last time that happened, Spy would be interested to know. Spy doubts that has happened before for anyone born after 1980.

Social media firm Reddit has come to market and will have made its backers rather happy. After pricing the stock at $34, it opened at $47 and closed the day 48% higher at $50.44, having touched $57.80 intra-day. The closing price gave the company about a $10bn valuation. It made a loss of $90m in 2023. It just goes to show, notes Spy, that a poorly spelled company name is no hindrance to money making. Geddit?

With the Easter public holidays ahead, you may be looking for some plane or beach reading. Spy recommends, Richer, Wiser, Happier: How the World’s Greatest Investors Win in Markets and Life by William Green. The book, published in 2022, is just as much about wisdom in your own life as it is about building successful investment portfolios. After all, what is the purpose of money, if not to have a successful, useful life.

Until next week…

Part of the Mark Allen Group.