Global Weekly: All eyes on Hong Kong

News item -

This week, Hong Kong was in the centre of attention. Not just because of the local election results, but also because of Alibaba’s listing on the Hong Kong stock exchange.

It started off with the outcome of the local Hong Kong elections, which showed a massive win for the pro-democracy camp, winning in 17 out of 18 district councils. Later in the week, president Trump signed two US bills on Hong Kong. The bills were focussed on topics such as trade and human rights. This will again put pressure on the relationship between US and China. It remains to be seen whether this will have consequences in reaching a phase 1 trade deal.

Despite all turmoil, Alibaba, China’s biggest online commerce company, successfully listed on the Hong Kong stock exchange. The company raised more than USD 11 billion, which it will use to invest in its e-commerce business and further develop its cloud computing and entertainment business. The listing will make the stock also more accessible to local Chinese investors, while also confirming the position of Hong Kong as a financial hub.

Meanwhile, equity markets continued their rally. US equity markets were able to set new all-time highs and the STOXX Europe 600 reached a new year high. If we look at equity sector performance of the past few days, we observe outperformance of health care and IT. The health care sector outperformance coincides with the sharp drop of Elizabeth Warren in the polls for the Democratic presidential nomination. So far, one of the key points in her campaign was “Medicare for all”, which implies big consequences for the health care sector. We remain overweight on IT and health care, while we are less constructive on the consumer staples and utilities sector.

On a company level, there was news from Telefónica. The Spanish multinational telecommunications company announced a big reorganization of its business, with the plan to increase cash flows and operating margins. In the luxury segment, Tiffany’s accepted the offer of LVMH to acquire its business, which resulted in the largest luxury deal ever. This week, the US shopping holiday season has also started, six days later than last year. It will be interesting to see how the US consumer and retailers will hold up in the current economic environment.

Bonds: Hope on trade

Trump declared on Tuesday that talks with China on the first phase of the US-China trade deal were near completion. Trump has announced before that he had reached a “substantial” but partial deal, that would see China ramp up purchases of US farm goods. But since then, the two sides have been wrangling over how to put the deal on paper and which tariffs the US will drop in exchange.

Stocks in Asia and US touched new highs on optimism that the countries will not escalate a tariff war that involves about USD 500 billion in products. This signals a positive look on the global economy, which is a requisite to not see lower-quality spreads widening.

Positive news on trade is seen as a risk-on signal, which should favour risky assets such as corporate high-yield and emerging market debt (EMD), while it prevents flows to safe-haven assets such as core government bonds. As EMD might see a renewal in the appetite, it may be prudent to look at those countries’ fundamentals, especially in Latin America where political riots have been occurring.

Latin American countries such as Chile and Bolivia have been experiencing volatility in their yields and saw spreads widening. It depends on how politics evolve, but so far, no contagion risks are expected. The situation in Chile should not mean much risk, as Chile has plenty of savings in its Wealth and Pension funds to cover any easing in fiscal policy.

Referring to the US fiscal stance, the projected economic slowdown for 2020 and the US deficits and debt over the medium term, can prove to be challenging. The US credit strength, though, should provide reliability -given the status of the dollar as the pre-eminent reserve currency. Monetary policy is expected to remain at the current levels, with no surprises such as the Fed turning more aggressive again.