20 ★ Wednesday28 August 2019Henny Sender
Markets Insight
Johnson & Johnsonled US drugmakers
lower after it lost a landmark ruling over
its part in fuelling the US opioid addiction
crisis.
An Oklahoma district court found that
J&J violated the state’s public nuisance
law and should pay $572m as part of a
one-year abatement plan.
While the amount was at the lower end
of expectations and was being appealed,
J&J still faced the greater uncertainty of
multi-district litigation beginning in
October, said analysts.
Altriaspiked then retraced gains after
confirming it was in talks to reunite with
Philip Morris, the international business it
spun out just over a decade ago, in an all-
stock merger of equals.
The retreat came after a cable TV news
channel said any merger of equals, if
agreed, would involve no premium.
JM Smucker, the jam and pet food
maker, slipped on weaker than expected
fiscal first-quarter earnings and a cut to
full-year guidance.
Organic sales fell, which management
blamed on higher competition for
premium dog food and deflationary
pricing on coffee and peanut butter.
Papa John’srose after naming former
Taco BelldirectorRob Lynchas president
and chief executive officer.Bryce ElderWall Street Eurozone London
TechnipFMCgained as investors
applauded a break-up plan, with the oil
services group saying it would carve out
engineering and construction divisions
from the higher-valued subsea and
surface rig business.
Piper Jaffray analysts called it “an
elegant evolution” in which Technip
would simplify and jettison the “complex,
difficult to analyse, opaque E&C
business” before its peak profit margins
start to normalise.
Enelled Italian stocks higher even after
talks between the opposition Democratic
party and the anti-establishment Five
Star Movement to form a coalition were
said to have reached an impasse.
Dometicof Sweden, the maker of
portable fridges, sunk after a US
manufacturer survey pointed to a sharp
drop in US sales of caravans and
motorhomes.
The RV Industry Association said
wholesale shipments were down 23.2 per
cent year on year in July. About half of
Dometic’s revenue comes from the US
market.
Danish insulation makerRockwool
slipped for a third day in the wake of a
profit warning, which it blamed on an
inability to pass on rising costs to
customers.Bryce ElderFergusonwas under pressure after Merrill
Lynch turned negative on the Americas-
focused building materials supplier.
The broker questioned whetherTrian,
the activist investor that revealed a stake
in Ferguson this year, could extract more
value than management through the
actions that it was already taking.
Switching Ferguson to a US listing
would cause problems for its large local
shareholder base and a disposal of the
UK operations was unlikely in the current
environment, Merrill said.
Just Eatslipped after Exane BNP
Paribas advised selling.
The main purpose of the company’s
proposed merger withTakeaway.comwas
to strengthen management but “we’re
not sure what can be done better”, it said.
“We think the primary challenge of Just
Eat is competition and, though
Takeaway.com sees little in its core
markets, those markets haven’t seen the
kind of investment the UK has.”
Standard Life Aberdeengained in
tandem with two of its largest portfolio
investments, the India-based companies
HDFC Lifeand HDFC Asset Management.
Competition worries weighed on
British American Tobaccoafter US-listed
peersAltriaand Philip Morrisrevealed
they were in merger talks.Bryce Elder3 Global stocks mixed after US and
China issue conflicting trade messages
3 Italy’s bonds rally on attempt by
politicians to form coalition
3 Sterling strengthens as MPs intensify
efforts to block no-deal BrexitGlobal stock marketsstruggled to find
direction yesterday as investors waded
through conflicting signals on the US-
China trade war.
Equities initially rose after President
Donald Trump said at the G7 summit in
Biarritz, France, that China “very badly”
wanted to make a deal.
But the state-controlled China Daily
newspaper later stated in an editorial:
“China wants to make a deal, but that
deal can only be reached based on
equality and mutual respect.”
As traders digested the contradictory
messages, the Nasdaq Composite index
and Dow Jones Industrial Average both
dipped 0.2 per cent while the S&P 500
index slid 0.3 per cent.
Stocks in Asia were more buoyant
earlier following Mr Trump’s softening
stance on trade.The CSI 300 index of
Shanghai and Shenzhen-listed stocks
gained 1.4 per cent alongside a 1 per cent
rise in Tokyo’s Nikkei 225 Average.
“Since Friday’s market rout, when the
tariff escalation between the US and
China reached a new level, both sides
have toned down their rhetoric, which
was enough to fuel a modest recovery infinancial markets,” UniCredit’s macro
strategists said in a note.
Both the region-wide Stoxx Europe
600 and Frankfurt’s Xetra Dax indices
closed 0.6 per cent higher.
Italian bonds were among the day’s
trading highlights in Europe.
The yield on Rome’s 10-year bond sank
19 basis points to 1.13 per cent as
politicians tried to establish a new
coalition government.
In core government debt, Germany’s
10-year Bund yields dipped 3bp to minus
0.70 per cent while the US 10-yearTreasury yield sank 5bp to 1.49 per cent,
holding above a three-year low.
In currency markets, the pound
strengthened 0.5 per cent to $1.2270 after
Jeremy Corbyn, Labour leader, stepped
up efforts to block a no-deal Brexit.
UK opposition parties agreed to
prioritise using legislation to stop the UK
from leaving the EU without a deal this
October.
China’s onshore renminbi fell to its
lowest level since 2008, weakening 0.
per cent to Rmb7.162 against the dollar.
Nikou AsgariWhat you need to know
China stocks rebound on hopes of trade detente
CSI indexSource: Bloomberg Friday Monday TuesdayThe day in the markets
Markets update
US Eurozone Japan UK China Brazil
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa
Level 2874.36 1469.68 20456.08 7089.58 2902.19 96795.
% change on day -0.14 0.61 0.96 -0.08 1.35 0.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 97.916 1.110 105.915 1.228 7.167 4.
% change on day -0.168 -0.090 -0.057 0.491 0.343 0.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 1.479 -0.695 -0.271 0.425 3.059 7.
Basis point change on day -4.550 -2.800 0.840 -5.300 0.800 0.
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 331.57 58.72 53.97 1503.80 17.05 2723.
% change on day 0.11 -0.24 0.39 0.12 0.53 -0.
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.Main equity markets
S&P 500 index Eurofirst 300 index FTSE 100 index||||||||||||||||||||
Jun 2019 Aug2800288029603040||||||||||||||||||||
Jun 2019 Aug14001440148015201560||||||||||||||||||||
Jun 2019 Aug7040736076808000Biggest movers
% US Eurozone UKUpsActivision Blizzard 3.
Costco Wholesale 3.
Newmont Gold 2.
Technipfmc 2.
Nektar Therapeutics 2.Snam 3.
Lufthansa 2.
Terna 2.
Enel 2.
Saipem 2.Nmc Health 6.
Standard Life Aberdeen 4.
British Land 4.
Land Securities 3.
Smurfit Kappa 3.
%DownsJm Smucker (the) -9.
L Brands -4.
Philip Morris Int -4.
Dxc Technology -4.
General Mills -4.
Prices taken at 17:00 GMTDeutsche Boerse -1.
Casino Guichard -1.
Jeronimo Martins -1.
Natixis -1.
Seadrill -1.
Based on the constituents of the FTSE Eurofirst 300 EurozoneBritish American Tobacco -4.
Just Eat -2.
Ferguson -1.
Standard Chartered -1.
Burberry -1.
All data provided by Morningstar unless otherwise noted.C
hinese stocks have been
among the smarter bets of
the past 12 months. The
Shanghai Composite index
has done better over that
period, in local currency terms, than the
S&P 500 or the MSCI World indices.
More rises are possible as a greater
weighting of Chinese stocks in global
benchmarks unlocks billions of dollars
of inflowsfrom foreign funds. But the
woes ofNoah Holdings, a Shanghai-
based wealth manager,serves as a
reminder of the vulnerabilities within
the country’s financial system.
Not long ago, Noah was anemblemof
China’s growing middle class, aiming to
service clients with a net worth of at
least Rmb1m ($140,000). It had offices
in dozens of Chinese cities, a sales force
of about 1,500 relationship managers
and in Wang Jingbo, its co-founder, a
compelling, media-friendly presence.
Thecompany peddled everything
from stakes in the funds of leading pri-
vate equity firms includingBlackstone
andTPGto the equities of local tech
start-ups and interests in venture capi-
tal funds. Through its Gopher fund-
management arm, itsassetsunder man-
agement came to more than $25bn at
the end of March this year.
Today, though, Noah has become
ensnared in a scandal that involved dis-
tributing a flawed (and allegedly fraud-
ulent) investment product that may
well turn out to be worth nothing.
Its New York-listed shares —offered
nine years ago byJPMorganandBank of
America—have tumbled more than
half from a peak in May 2018, when its
market capitalisation topped $4bn.
Problems began when Noah began
distributing securities packaged by a
Hong Kong-listed firm calledCamsing
International. The securities were alleg-edly backed by falsified transactions
and accounts receivable with business
partners includingJD.comandSun-
ing.com, according to Caixin, a
respected mainland financial publica-
tion. The controlling shareholder of
Camsing wasdetainedlast month by
Shanghai police over suspected fraud.
Noah’s executives say they are victims
of the scheme and it is takinglegal
actionto claw back about Rmb3.4bn. No
sooner had the news broken than regu-
lators moved toissue toughened guide-
lines on supply chain financing.
The episode raises questions about
the capability and risk management of acompany that has received all kinds of
accoladefrom industry publications.
It also raises more serious questions
about the possibility of contagion. Noah
is not a bank so cannot avail itself of
central bank support programmes.
“If things go wrong, nobody is behind
Noah,” said one Hong Kong-based
financial analyst who added the chances
of any recovery of the money are low.
Investors need to bear this in mind. In
recent months many fund managers
appear obsessed over trade frictions
with the US rather than focusing on
matterssuch as China’s rising debts and
the possibility of defaults and frauds.
Fears about creditworthiness have
been overshadowed by politics even as
China shifts from being a capital
exporter to a capital importer, and as
stress on reserves grows as the renminbiweakens. But many analysts saidwealth
management products — a big chunk of
a shadow bankingsector worth about
$9.1tn — are a source of systemic risk.
When mainland savers lose money on
their investments, their first resort is to
look for the deep pockets behind the
products they have purchased. In the
past, that has meant going to the banks
that have usually distributed products
created by so-calledtrustcompanies.
Anyone walking past the main branch
ofChina Merchants Bankin Shenzhen
in recent days, for example, can see
signs held up by clients of that bank
demanding compensation for losses.
But if things go wrong outside the
banking system, where do investors go
for recompense? Where does the money
of households looking to earn some-
thing on their savings go when Noah was
seen to represent a badge of quality?
“The confidence issue affects most
asset management firms in China,” said
one of Noah’s former executives. “There
is a flight to quality. The issue, though, is
really the investment environment.
There are so many black swans.”
For Beijing, the big question is how to
balanceconcernsabout social stability
with the need to instil discipline inthe
firms that sell the products and the buy-
ers of them. “Regulators are aggres-
sively targeting moral hazard,” said
Jason Bedford, an analyst at UBS in
Hong Kong, speaking generally about
the wealth management market.
Noah is due to announce its second-
quarterearningstoday. It could, in time,
put the scandal behind it. But for now,
investors should bear in mind that
China’s development remains perilous
— even for stocks apparently immune to
trade tension with the US.[email protected]Noah’s dark times are
a reminder of Chinese
financial vulnerability
‘The issue, though, is
really the investment
environment. There are
so many black swans’
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