Emerging Market Stories to Watch This Week
Bolsonaro's Self-Sabotage, Another False Jack Ma Alarm, Huawei Sanctions Bite
Brazil: The Petrobras Distraction
Carnival week ended abruptly in Brazil as mercurial president Jair Bolsonaro sacked the sober technocrat in charge of state oil flagship Petrobras (ticker:PBR) and replaced him with an army general. The ousted chief’s sin: raising fuel prices in line with crude oil, which pissed off Brazil’s restive army of truck drivers.
Petrobras shares promptly plunged 7%, with worse likely to come. But Brazil has bigger fish to fry as it gets back to work, and the outlook there is less dismal. The Latin American giant contained pandemic damage last year with generous cash payments to the population: so-called coronavouchers. Its task this year is to dial those back before they cause a debt crisis, without abandoning the poorest families and shredding the government’s popularity.
That’s a challenge with a Congress that includes 584 members from 30-some parties. But the right guys (at least not the wrong guys) seem to be in charge. Lower house leader Arthur Lira and Senate counterpart Rodrigo Pacheco, elected earlier this month, are both pledging to work with Bolsonaro’s much-lauded (by investors) finance minister, Paulo Guedes, on threading the pending fiscal needle and longer-term reforms to the tax system and top-heavy bureaucracy.
It wouldn’t take much for Brazil to surprise on the upside. It’s the last big emerging market that’s still cheap. The U.S.-traded ETF (EWZ) is down 15% from a year ago, while global EMs have gained 33%. So let the bad Petrobras news sink in for a few days, then watch the financial horse trading in Brasilia.
Ant Group is NOT Alibaba
Hands may be wrung again as the trading week starts about those bad Beijing bureaucrats who are tormenting poor Jack Ma and threatening his crown jewel, Alibaba (BABA). Don’t fall for it.
Over the weekend, Chinese regulators announced substantial restrictions on fintech lending, the kind that was supposed to propel Ma’s other jewel, Ant Group, to a world’s record IPO last fall. Alibaba’s shares plunged by a quarter in seven weeks after that plug was pulled. They’ve gained about half that ground back since.
Before you sell this time, there are a few things to bear in mind:
1) The latest regulations are basically what was flagged in November. They are not a negative surprise.
2) The regulations are reasonable. Ant was growing like crazy by originating online loans then immediately selling them on to licensed, mostly state-owned banks. Not so unlike the U.S. mortgage cowboys who gave us the Global Financial Crisis 13 years ago. Now Ant, and online competitors, will have to hold 30% of their loans on their own books. Bad for them, because they’ll have to raise capital and can’t market themselves as the “asset-light” companies that markets currently love. But good for financial sanity.
3) Most important, Ant is not that big a deal for Alibaba. BABA still owns a third of its former financial division. If the IPO had gone forward as planned, that would have been worth $100 billion, or 14% of Alibaba’s current market cap. Assuming Ant’s value has been cut in half, that’s a 7% loss for Alibaba, a fraction of how much investors marked it down in November-December.
Alibaba may well be caught up in a global tech stock correction one of these days. That’s way beyond my competence to predict. But for now, look to buy on any panic.
Huawei Loses. So Who Wins?
U.S. economic sanctions may not deter sovereign states like Russia or Iran. But they could be turning the world’s biggest telecoms equipment manufacturer into the former biggest telecoms equipment manufacturer. That would be Huawei, which Donald Trump’s administration put under an export blockade thanks to its alleged links to China’s military and intelligence services. Huawei was a U.S. security concern before Trump, and Joe Biden is unlikely to go much easier on the company.
Huawei admitted as much last week, telling suppliers its smartphone production will fall more than 60% this year, Nikkei Asia reported. That opens a 100-million-or-so phone hole in the market for competitors like Xiaomi (1810.Hong Kong), ZTE (763. Hong Kong) and Samsung (005930. Korea) to fill.
But the really interesting part is what happens to Huawei’s one-third share of the global market for 5G equipment, demand for which should shoot up over the next few years. Shares in top competitors Ericsson (ERIC) and Nokia (NOK) have not exactly burned up the market as Huawei struggles. Samsung is making a big push into 5G kit, scoring a $6.6 billion contract last fall to supply top U.S. carrier Verizon (VZ). But like the two Scandinavians, it’s a big company that does lots of different things. If you can find a pure-play 5G stock that isn’t Chinese, buy it. But in any case, watch carefully.