Merry Christmas to all of you! This week’s Market Mayhem covers the ten days prior to New Years. That’s because there was very little going on during Christmas (believe me, besides resting, I was scouring the FT every day for something interesting to report).
Also, look out for a a year-in-review piece, where I’ll summarise all of the relevant moves in 2021.
Tencent In The Crosshairs?
Beginning in March 2022, Tencent Holdings plans to sell 457 million of its Class A shares in JD.com, reducing its stake in the e-commerce firm from 17% to 2%. The proceeds, which would equate to €13.5 billion based on the last closing price of 261 HKD, will be distributed to shareholders in the form of a special interim dividend. Martin Lau, a Tencent executive director, departed JD’s board immediately after the announcement.
The separation will likely harm JD.com, which has benefited from its partnership with Tencent; the latter controls 40% of China’s electronic payments market through the WeChat and QQ Wallet platforms. JD’s stock price fell in response.
The move presumably follows pressure from Chinese authorities, who are concerned with Tencent’s controlling grip on the technology industry. We can assume that their goals are to reignite economic competition and prevent a concentration of power in the hands of corporations.
Whilst Tencent is a behemoth in itself, much of its influence stems from its investing activities. Indeed, besides small holdings in Western firms such as Tesla and Spotify, Tencent owns 16% of the Chinese e-commerce group Pinduoduo and 17% of the food delivery company Meituan. The problem is that these firms have near-monopolistic home market positions; Pinduoduo is the largest e-commerce firm by number of users, whilst Meituan holds a local market share exceeding two-thirds.
It’s clear that these investments afford Tencent substantial competitive advantages, and if the government forces Tencent to relinquish them, the firm will be in a precarious position, since its core business involvement in gaming and social media will be fully exposed to regulatory crackdowns. The Chinese state does not want citizens to spend their time on these activities, and Tencent can no longer seek refuge in diversification. The firm is down 20% this year.
SenseTime Marches On
The controversial Chinese firm, SenseTime, was blacklisted by the U.S. Treasury recently on allegations that its face recognition technology enabled the persecution of Uyghur muslims in the region of Xinjiang. A handful of U.S. firms already hold minority stakes in SenseTime, namely the private equity group Silver Lake, Fidelity, and chip-maker Qualcomm.
As expected, the company denied the charges, but initially postponed its planned IPO. Now, the doubt is gone and it’s clear that SenseTime will proceed anyway; shares will begin trading in Hong Kong on December 30th, backed by a group of Chinese cornerstone investors with ties to the government. The firm plans to raise about $750 million. SenseTime’s management acknowledged that its shares may trade at a ‘regulation discount’ and be less liquid as a result of the U.S. ban.
Interestingly, the blacklisting doesn’t actually apply to the listing entity (SenseTime Group Inc.), but a specific subsidiary, meaning that U.S. investors could still subscribe to the offering. However, the company itself will not permit this as the list could easily be updated to include the parent firm, and the Treasury is apparently known to make such adjustments later on.
The Man with a Plan
From previous newsletters, we understand that Turkish inflation is through the roof. It then follows that Turkish citizens hold their savings not in Lira, but in foreign currencies and hard commodities like gold.
Erdogan wants to prevent this, and recently unveiled a complex savings scheme to protect individuals - not businesses - from fluctuations in the Lira’s foreign exchange rate. Here’s how it works (courtesy of an FT explainer).
A Turkish saver wants to deposit TL 1,000. He gives up the ability to withdraw the money for a minimum period of three months and a maximum of 12 months.
Let’s say that he picks a 12 month maturity, which yields an interest rate of 14% (remember this). So, when he withdraws the money, the saver holds TL 1,140.
If the foreign exchange rate of the Lira falls more than 14% - i.e., from 10 Lira to the Dollar to 12 - the Turkish government compensates the saver for the difference. Instead of picking up TL 1,140, he will withdraw TL 1,200 (the equal, foreign exchange adjusted sum).
The scheme does have a protective effect, but if the money is withdrawn prior to maturity, the saver is fully exposed to exchange rate fluctuations, and loses the interest rate that was initially locked in. Also, the plan will place quite the burden on Turkey’s public finances. The treasury is obligated to fork over cash, and that pile will only grow in size if the Lira continues to lose value beyond prevailing bank rates.
Nonetheless, the announcement appeared to stabilise the Lira.
The consensus among experts is that the scheme is a temporary solution which depends on public faith. If depositors don’t flip their existing savings to the initiative, it becomes ineffective. It looks like Erdogan may have to shake hands with orthodox economic policy - such as raising rates - sooner or later.
Top Reads
“Elon Musk: Interview with FT’s Person of the Year” - Financial Times
“Global bond markets on course for worst year since 1999” - Financial Times
“You Can Be a Stock Market Genius” - Joel Greenblatt. An excellent, cheap book that teaches you how to invest in special situations, such as spinoffs and restructurings. Simple language and in-depth case studies help you understand Greenblatt’s logic, and how he produced a 50% annualised return in his early career. Honestly, I got it for Christmas and couldn’t be happier.
Note: the Amazon link affords me a few cents of commission, so you can be sure that I’m pushing this book because I know it will be valuable to YOU.