Börse & Märkte

China On The Mend - Fed Tapering Talk Weighs - Tesco's Sensible JV In China

So, upbeat China data restoring some lost confidence in the country. Retail sales, industrial output both better than expected as well as the moderate inflation figure. Aside from the poor PPI, all other metrics point to an improvement in economic activity. China government’s initiatives to kick-start growth bearing fruit; this could be the start of a much needed turn around for China and help keep the pace of growth above the 7% level on an annualised basis. Growth dipping below 7% got the market feeling super nervous.

 

This year so far, the economic recovery stories of the US, UK and now euro zone have fuelled much of the optimism in the market place which has pushed developed market indices to sit multi-year highs, or for the US market, unprecedented record fresh highs to levels we have never even seen before. S&P last week above the 1700 mark, a memorable move which will be noted in the financial history books. Of course, easing measures by developed market central banks [FED, BOE & ECB] have played a significant part in driving the advance across global risk assets.

 

China has been the underperformer as growth deteriorated and the country’s money market started to dry up. Market participants’ enthusiasm over a full blown economic recovery was curbed by the troubling noises out of China but for the bulls today, the data we have seen overnight is easing some of the fears of a further slowdown in China. Bullish investors are breathing a sigh of relief now that China is finally playing catch up with Western peers in the story of global economic growth.

 

Additionally, it’s worth noting that we still have no clear idea of when the Federal Reserve will start to taper asset purchases –jobless claims yesterday rose, another sign that momentum in the labour market remains slow, a week after the mixed-bag nonfarm payrolls report. Sure, most facets of the US economy have improved but the Fed has explicitly said that tapering of stimulus is tied to the unemployment rate edging to around 6.5%.

 

At present, the unemployment rate is at 7.4%, so we need more growth in the US jobs space before we can be more certain on tapering. On Thursday, Dallas Fed head Richard Fisher shot down the idea of QE infinity, calling for tapering to start. Fisher is a well known critic of the Fed’s stimulus programme so his remarks shouldn’t come as a big surprise but his views are now being shares by a number of his colleagues who have spoken this week. Chicago Fed Charles Evans turned hawk on Fed policy this week, indicating that tapering should start in September. Evans was a QE-friendly kinda guy so his switch raised the markets’ expectations of tapering next month. Evans now joins Fisher and Dennis Lockhart of the Atlanta Fed and Sandra Pianalto of the Cleveland Fed in calling for tapering next month.

 

Realistically, it’s unlikely that the Fed will taper stimulus next month and all this pro-tapering hot noise by Fed members’ this week could just be another way for the Fed to manage the markets’ expectations. Perhaps the Fed wants us to think we are in for tapering in September but then surprise us at next month’s policy meeting by feeding us liquidity pills for another few more months? Asian markets like this. The region has been the biggest winner of easy cheap Fed cash over the years so the prospects of loose money still flowing through the system is clearly welcome relief.

 

In corporate news, UK supermarket giant Tesco demonstrates its commitment to its UK growth strategy by signing a sensible JV with CRE in China. Through this JV, Tesco is attempting to adjust its operations in China in a way that allows the company a level of presence there but spending less on capital expenditure. Tesco’s stake in the JV is 20% while CRE is 80%, reflecting this move. Tesco keeps business alive in China but the stake is small enough for the UK supermarket to exit the country if things hit the fan [losses start to exceed ROE] just like it did with US operations.

 

Tesco’s strategy is clear; the company’s global sales have deteriorated rapidly in recent years and earlier this year, Tesco announced that their strategic focus will be re-investing in their UK operations and exited their loss-making business in the US to re-enforce this new strategic initiative. So capex in UK has increased while capex elsewhere reduced - in the UK, Tesco’s plan is to pump investment to evolve Tesco into a beast of hypermarket one stop shop for all which poses a significant threat to its UK rivals and retailers on the whole as Tesco beefs up its stock of electronics, clothing and general household goods.

 

So in conclusion, this JV in China is welcome news for Tesco shareholders as it demonstrates the company is committed to its priority to pump more funds in the UK over international business but the company still maintain a presence via a JV which allows them to maintain market share amongst global supermarkets. Shares are responding accordingly.