17 August/18 August 2019 ★ FT Weekend 11MARKETS & INVESTING
HUDSON LOCKETT— HONG KONGHong Kong’s stock market rout has
lopped about $15bn off the net worth of
its 10 richest tycoons as clashes
between police and protesters that
have weighed on asset prices show little
sign of letting up.Li Ka-shing, Hong Kong’s richest man,
has racked up paper losses of more than
$3bn since the end of July, according to
Financial Times calculations based on
Bloomberg data tracking the billion-
aires’ disclosed positions in listed com-
panies.
Mr Li, as well as Lee Shau-kee, head of
Henderson Land, and Lee Man-tat,
chairman of the parent company of
sauce maker Lee Kum Kee, have seen
their fortunes drop almost one-tenth in
August.
Representatives of the three men did
not respond to requests for comment.
The protests, sparked by a bill pro-
posed by the territory’s chief executive
Carrie Lam that would allow the extra-
dition of suspects to mainland China for
the first time, had until this month left
stocks relatively unscathed.
But as protests have intensifiedin theface of government inaction and police
crackdowns, the benchmark Hang Seng
index has dropped about 8 per cent over
the past fortnight.
The sell-off has put the index in the
red for 2019, making it the only devel-
oped market benchmark in negative
territory among the 25 tracked by
Bloomberg.
Hong Kong’s total market capitalisa-
tion has dropped about HK$2.67tn
(US$340bn) so far this month.
As Beijing’s rhetoric has ramped up,the property tycoons have made shows
of loyalty through their companies,
which have issued statements support-
ing Ms Lam and police. But such moves
have not done much to stem losses.
Falls in property stocks of 8.5 per cent
this month have outstripped the
broader market’s decline.
Mr Li took out a front-page advertise-
ment in Hong Kong newspapers yester-
day calling for an end to violence and
for people to love China and Hong
Kong.
Willy Lam, a China expert at the Chi-
nese University of Hong Kong, said the
unrest had probably prompted local
tycoons to privately ask Beijing for a
softer approach towards Hong Kong in
the short term.
“They also realise that perhaps Hong
Kong’s situation would take months if
not more than a year to resolve,” he
added, which could encourage them to
take their money elsewhere.
Mr Li is among several tycoons who
have shifted away from Hong Kong and
Chinese property development in
recent years, homing in on businesses in
developed western countries that gen-
erate stable cash flows.Equities
Hong Kong political unrest slices $15bn
from fortunes of territory’s billionaires
HENRY SANDERSONThe price of cobalt has soared more
than 30 per cent since Glencore
announced this monthit would close
the world’s largest mine for the battery
metal, offering hope for a sector whose
shares have been hit by fears over a
global recession.The rise of electric cars propelled cobalt
to its highest level in 10 years of $44 a
pound in April last year, before crashing
to $12 following a surge in supply and
stockpiling by companies in the battery
supply chain.
Glencore, the world’s largest producer
of cobalt, said early last week that it
would shut its Mutanda mine in the
Democratic Republic of Congo at the
end of this year, saying mining the metal
was no longer “economically viable”.
Since then, cobalt prices have risen
almost one-thirdto trade at $16 a pound
yesterday, according to Fastmarkets.
The closure was “definitely needed to
stimulate long-term investment in
cobalt supply”, said George Heppel,
an analyst at consultancy CRU in
London.
“With cobalt at $12 a pound, that wasnot sufficient to keep the market well
supplied in the long run.”
The price rise will come as a relief to
cobalt miners, whose shares have suf-
fered from growing fears about a global
economic slowdown following Presi-
dent Donald Trump’s decision to
impose 10 per cent tariffs on $300bn
worth of Chinese exports in July.
Shares in Glencore have slipped 23
per cent this year, hittingtheir weakestlevel since October 2016 this week.
JPMorgan analysts downgraded their
rating on the stock to “underweight”
late this week, saying the US-China
trade war could threaten the miner’s
dividend by hitting commodity prices.
The DRC is the world’s largest pro-
ducer of cobalt, which the country
mines alongside copper.
But a surge in supply from new mines
and an influx of small-scale miners hasbeen one of the key reasons behind
cobalt’s price crash.
Cobalt demand from smartphone
makers has also slowed as the global
market reaches saturation. Mobile
phone sales fell5 per cent in China in the
first seven months of this year, accord-
ing to CRU.
But prices are likely to rise further,
said Mr Heppel, as the closure of Glen-
core’s mine shifts the global market
from surplus to deficit next year.
Apart from Mutanda, Glencore also
produces cobalt from its Katanga mine
in the DRC, as well as its Murrin Murrin
deposit in Australia and nickel opera-
tions in Canada.
Carmakers are trying to reduce the
amount of cobalt in their batteries, due
to the risks of supply chain disruption,
but that fall is likely to be offset by
growth in demand for electric cars,
according to Benchmark Mineral Intel-
ligence.
Cobalt is critical for battery safety in
lithium-ion batteries, which can catch
fire due to the flammable electrolyte.
In April, BMW agreed to buy cobalt
for its batteries from Glencore’s Murrin
Murrin mine in Australia.Commodities
Cobalt leaps 30% after Glencore reveals
closure plan for world’s largest mine
The closure was ‘definitely
needed to stimulate
long-term investmentin cobalt supply’
Li Ka-shing has used newspaper
adverts to call for an end to violenceFastFT
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ft.com/fastftROBIN WIGGLESWORTHPlenty of people have had a holiday
ruined by a work-related emergency,
but few have had a break as thoroughly
wrecked as Michael Hasenstab did this
week.
Franklin Templeton’s star bond
fund manager, an avid mountaineer,
was on vacation whenMauricio Macri’s
unexpectedly heavy defeat in Argen-
tina’s primary elections triggered may-
hem in the country’s financial markets
this week.
Fears that the Peronists will now
regain power sent the Argentine stock
market down 48 per cent in US dollar
terms on Monday. That was the second-
biggest one-day slump suffered by any
bourse since 1950, outdone only by the
1989 collapse suffered by the Sri Lankan
stock market amid a civil war.
More pertinently for Mr Hasenstab
and the $115bn of bond funds he man-
ages for Franklin Templeton, the peso
tumbled and Argentine debt cratered as
investors worried that the resurgent
Peronists will sabotage a vital IMF pro-
gramme and lead to Argentina’s ninth
sovereign default since independence
in 1816.
“We believe the probability of a
restructuring is high next year
given large financial needs, limited
market access and fiscal challenges
amid a recession,” Bank of America
analystssaid.The turmoil cost Mr Hasenstab’s
funds dearly. Morgan Stanley estimated
that they had loaded up on $7bn of
Argentine bonds in the belief that Mr
Macri would succeed in reforming Latin
America’s perennial economic basket
case. The fierce sell-off also raised ques-
tions over Mr Hasenstab’s unusually
aggressive approach to bond investing
— and whether the sun has finally set for
such high rollers of the money manage-
ment industry.
Bill Grosswas the prototype “bond
king”, transforming an industrydomi-
nated by stolid insurance companies,
pension funds and bank treasurers that
bought bonds when they were issued
and held them until they matured.
Mr Gross’s firm, Pimco, introduced a
trader’s mentality, with portfolio man-
agers flitting in and out of debt around
the world to try to generate better
returns. Mr Gross’s Total Return Fund
was the heavyweight of these new free-
wheeling bond funds, at one point man-
aging nearly $300bn.But Mr Gross’s performance began to
wane following the financial crisis. In
2014, he was ousted from Pimco and an
attempted resurrection at Janus Hend-
erson fizzled out. In February, Mr Gross
finally retired.
Mr Hasenstab found a way to turn size
into an advantage — he scoured the
world for struggling countries that he
thought were facing a temporary crisis.
The bookish fund manager is less
brash than other well-known bond
investors, such as Mr Gross and Double-
Line’s Jeffrey Gundlach, largely eschew-
ing the pithy soundbites that helped cat-
apult them to fame.
But in investment style he is far more
similar to the popular conception of
asset managers as buccaneers of capital
placing big bets for bigger gains.
The prime examples are Hungary
and Ireland. Following the financial and
eurozone crises, he bought up massive
amounts of their debt even as other
investors fled. At one point, Franklin
Templeton funds owned over a tenth oftheir bond markets, positions so large
they made rivals blanch. But the invest-
ments played a crucial role in helping
suppress the countries’ cost of borrow-
ing at a difficult time.
“They see Irish debt as very good
value and have taken a firm decision
that the Irish economy is recovering,
has turned the corner and they will be
paid back,” Brian Hayes, Ireland’s dep-
uty finance minister, told the Financial
Times at the time. “They will yield a
substantial dividend from it.”
Indeed, for a period Mr Hasenstab’s
flagship fund, the Templeton Global
Bond Fund, was one of the best per-
forming in the world. It is a strategy that
he has replicated several times since, in
places ranging from Mongolia to Ghana,
Nigeria, Ukraineand now Argentina.
Despite the latest Argentine shock,
Mr Hasenstab could still manage to turn
around his $7bn bet. Ukraine eventually
restructured its debts but Franklin
Templeton managed to extract a cumu-
lative return of 16 per cent from its bet.
The question is whether most inves-
tors have the stomach forthese kind of
trades and the unnerving volatility that
they entail. Rivals argue it is better
suited to a hedge fund.
It is telling that hardly any other bond
fund managers make these kind of big
calls any more. Franklin Templeton
declined to comment.
Indeed, investors are increasingly
moving in the opposite direction. In a
sign of the times, the three biggest fixed
income funds in the world are passive
index trackers. Bond ETFs this year hit
$1tn of assets under management.
The bond kings’ era might well
be over.Aggressive moves by star fund
managers are falling out of
fashion as passive ETFs grow
The bookish
fundmanager is
less brashthan other
well-knownbond
investorsMichael
Hasenstab
loaded up on
$7bn of
Argentine
bonds,
according to
estimates
FT Graphic/AP/BloombergFixed income.Sell-off
Hasenstab’s Argentine beating
raises doubt over bond kings
Fixed income, but volatile returns
Franklin Templeton Global Bond Funds annual performance ( )* Year-to-date returns
Source: Morningstar- *RICHARD HENDERSON— NEW YORKInvestors have flocked to US bond funds
at the fastest clip in two months as
volatile trading and a deteriorating
growth outlook nudge investors into
safer assets.
Fixed income mutual funds and
exchange traded funds added $11.5bn
for the week ended Wednesday, the big-
gest weekly figure since early June and
the fifth-largest on record, according to
data from EPFR Global.
US bond funds hold $2.8tn, $200bn
more than at the start of the year.
Safe government debt likeUS Treas-
ury bondshave lured investors away
from riskier investments like equities
and high-yield bonds asthey become
uneasy that the long global economic
expansion is set to turn.
The surge in buying activity sent the
yield on the 10-year Treasury bond as
low as 1.52 per cent on Thursday, a level
not seen since 2016, while the 30-year
government bond dropped to an all-
time low.
The 10-year Treasury briefly yielded
less than two-year government debt this
week, invertingthe “yield curve” — a
previously reliable signal of an impend-
ing recession, which added to investor
skittishness.
“It’s dramatic,” said Henry Song, a
portfolio manager at Diamond Hill Cap-ital Management, speaking of the drop
in Treasury yields. “It feels like we’ve
had a mini cycle since 2016 — we’re now
back at the level where the 10-year
Treasury was three years ago.”
Bond ETFs accounted for $5.5bn of
the week’s $11.5bn inflow, reflecting
how investors have become comforta-
ble using these kinds of funds for trad-
ing the fixed income market.
Some investors warned that the fear
triggered by the yield curve inversion
might be overdone. Positive economic
data from the US, includingretail sales
figureson Thursday morning that out-
shone expectations, pointed torobust
consumer sentiment, even if manufac-
turing data has been more mixed.
“If the domestic data continues to
hold [up], it follows intuitively that
upward pressure on rates will result as
near-term recession fears appear tem-
porarily unfounded,” said Ian Lygen,
head of US rates strategy for BMO. “The
inversion in 2s/10s is a well-
documented recessionary flag but that
need not imply a true contraction is
imminent.”
Jim Tierney, chief investment officer
for AllianceBernstein’s concentrated
growth equities fund, said investors
might be incorrectly expecting a US
recession.
“Retail sales, inflation — these are all
really good numbers,” Mr Tierney said.
“Could we talk ourselves into a reces-
sion here? It sure feels like it.”
Additional reporting by Colby SmithFixed income
US debt funds
buoyed as
investors
seek havens
‘It feels like we’ve had a
mini cycle since 2016, we’re
back where the 10-yearTreasury was 3 years ago’
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