Blain’s Morning Porridge – Nov 17 2020: China’s Charm Offensive

“In the midst of chaos, there is also opportunity.”

China’s brilliant bond issue, Saudi Aramco’s desperate dice throw, Tesla’s elevation to the S&P and what next for Scotland… 

China’s plan to issue a multi-tranche Euro denominated jumbo bond deal aimed at European investors this week is utterly brilliant.  It might go down as the most cynical market timing moment in recent bond market history…

As the US economy goes into a second tumble, lockdowns are imposed, pandemic infections explode, and the cold civil war in the US intensifies with increasing concerns on what further damage Trump can do from the White House Bunker, up pop the Chinese offering a nice plump opportunity to invest in a growth economy coping well with the virus. On a strict Sovereign investment basis – what’s not to like about positive yield China debt at 0.1% when Italy 5-yr debt is zero percent?

The China deal will find a responsive investor base in Europe.

American’s just don’t seem to understand the damage the election drama has done to global perceptions of the USA. Across Europe investors are staring in open-mouthed horror at the deep divisions, polarisation and denial of the democratic process the election has revealed. They see clear parallels to Europe’s tortured 1930s when they hear otherwise sane and rational Republicans turn logic on its head and declare “Biden has to prove he won the election and there wasn’t fraud.”(BBC Panorama last night.)

I was on a call with a major French fund yesterday, and they were shocked at how quickly “the US appears to be unravelling” – they admit it’s a struggle to put a compelling investment narrative around US growth, stocks and outcomes.

The world has changed – and the Chinese are riding the new curve higher..

As Trump fiddles while Coronavirus burns down his country… the Chinese will be out there offering attractively priced debt, and using the deal as a window from which to build on their charm offensive towards Western Investors. Their decision to tap European investors (following a deal last year), is a clear signal to Washington they no longer regard the Greenback as the global primus inter pares currency. It’s a sign of favour towards the Euro. It comes as investors around the globe look at China as a market to pivot towards – just read the stream of consciousness Ray Dalio of Bridgewater has been putting out on China in recent weeks.

I am slightly more cautious that Ray – but I wrote about the China Investment pivot in Master Investor yesterday: China Vs USA: which economy would you bet on? I was questioning just how much we should dive into an economy we don’t fully understand, where the data is debatable and the legal path to decisions can be trumped at the highest levels on apparent personal whims – that said I did make the point I am still adding to my China allocations.

The China deal out digitally roadshowing the deal will be well prepared to answer investor questions on the sudden decision to shut down on the Ant Financial IPO and frame it as sound regulation to put a complex shadow banking network under a fit and proper capitalisation regime. They will explain the new clampdown on monopolistc China tech practices (highlighted in the FT this morning – How China’s Big Tech companies upset Beijing), are actually enhancing the efficiency of their rapidly digitising economy.

The China deal team might struggle a little as they try to explain some of the banking and shadow banking risks Bloomberg recently raised: How Can Banks Possibly Absorb All These Defaults?

They might get annoyed over investor concerns on their cack-handed approach to democracy in Hong Kong and the treatment of the Uighur minority – and will bristle as they explain domestic policy imperatives. The Chinese struggle with direct questions and criticism – which is why they come off badly in difficult negotiations and initiatives like their Belt and Road trade links have struggled. However, such concerns will no doubt be overcome by an attractive bond coupon, and why upset China now?

Meanwhile… Saudi Aramco

The Saudi Aramco decision to sell billions of dollars in global bonds doesn’t look nearly so clever. Aramco is raising debt to pay dividends because it’s oil revenues have tumbled. It’s promised to pay a $75 bln dividend – but Q3 income was a mere $11.8 bln. Leveraging up its future to pay for its present…

Without the dividend income from Aramco, the Saudis will run of cash to fund their topsy-turvy economy rather quickly – and certainly wouldn’t be able to afford the cost of “digitising” their economy, refocusing from oil revenues, let alone dealing with their immediate employment and educational imperatives in the major cities.

Which makes the investment decision on a 50-year oil company bond rather interesting. To buy 50-year oil you are either breaching every single common sense E component of ESG, or you are taking the bet Aramco will morph from Oil into a (Clean) Energy company. But for that to happen Aramco is dependent on the Saudi state channelling funds, contracts, R&D and directing infrastructure spending towards to renewables and the company – which the government is struggling to do after paying the costs of a million princes, and ill-advised war, MBS’ court-cases, and keeping the lid on domestic pressures.

Aramco might be the largest and most profitable company on the planet, but its hardly looking like an investment “must-have”.


Much as I hate Tesla, Musk’s piggy bank has been one of my top performing market positions this year. (My excuse is that when I dumped Tesla, I forgot about a modest position in a small side account..) I still have zero conviction its worth even 20% of its current hatstand market valuation – but let’s just roll with and see where it goes. The announcement it will now be part of the S&P 500 has kicked up the price another bazillion percent and made Musk even richer.

It’s the largest firm to join the index in decades – which will have all kinds of effects. Billions of dollars will be spent in rebalancing trades as index trackers sell other 500 stocks to add Tesla which will go up and up and up… It will add credibility to Tesla, but also raise expectations of better Governance behaviour from Musk.

How much longer will it last?

I’ve consistently got Tesla utterly wrong. I’ve repeatedly said its overvalued, I’ve rebuffed every whiny Millennial telling me I “don’t understand” the company or its potential – that its about batteries, automated driving, its digitisation, blah blah blabbity blah blah. It’s a car maket. It makes good cars. Its creating a better future for the planet by driving the shift to electric vehicles. It is having its moment in the sun – and eventually it will be overtaken by competition as more firms enter the market. Going to happen… and the value will… what?

When I ask younger investors why they are such Tesla fans, I’m usually Musk is the critical ingredient to Tesla’s success. If you are under 30 (the age when cynicism triumphs over hopes) you will inevitably be a Trump fan.

What if Musk now backs away from Tesla? He’s achieved respectability and riches. What if he now focuses on SpaceX – which, though it pains me to say it, is a shaping up to be a great and really innovative company?

Tesla wants to be the Apple of the EV market. It took Steve Jobs years to make Apple the Apple it is still today. He was succeeded by a logistics man – Tim Cook, who has made the company into an unassailable commodity goods stock. Can Musk step away from Tesla without terminally damaging it? Doubt it…

And finally.. Scotland – It’s going to happen. 

Yesterday I read a great idea from Roy Leckie, a chum of mine back home in Scotland: What Hong Kong can do for Scotland. Brilliant idea! I once proposed giving Canary Wharf to HK expats, but giving them a home in the Central Belt would be even better. Can you imagine the economic boost 100,000 Hong Kong residents would create?

After Boris made a second Scotland referendum – which the SNP will win – a racing dead certyesterday, I am beginning to get a wee bit concerned about my own thoughts on Scottish Independence..

I’ve long been a staunch believer in every Scotsman’s right to come down to England and get rich… and the advantages to Holyrood of exploiting the Union (and emptying English purses) for our betterment… It’s worked in our favour for 400 years, but recently I’ve been thinking: Scotland has a large number of smart clever people, and why couldn’t we make a decent fist of making a small nation a success?

The problem is the SNP have made the debate emotional. It needs to be rational.

Yet, I find myself wondering if it might makes sense? I am getting to a stage where a new Union of independent nations on the Islands of Britain might make sense – retaining the Crown, sharing common defence and trade relationships, but otherwise independent? I’d be interested in thoughts on the subject….

Five Things To Read Today

FT – Eurozone Economy: the struggle to stay afloat until a vaccine arrives

BBerg – Pound Is Seen Falling 5% if UK Trade Talks with EU Go Nowhere

Torygraph – Misson Impossible? UK races to get ready for 2030 switch to Electric Cars

WSJ – “Predatory and Opportunistic”: Southwest Airlines Seizes the Moment as Rivals Struggle

WSJ – Global Regulators Highlight Need to Shore Up Money-Market Funds After March Turmoil

Out of time and back to the Day Job

Bill Blain

Shard Capital