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Goldman Sachs sees Chinese yuan strengthening over the next 12 months

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A Chinese clerk counts renminbi yuan banknotes at a bank in China on December 2015.

Jie Zhao | Corbis News | Getty Images

SINGAPORE — Goldman Sachs expects the onshore Chinese yuan to strengthen to 6.5 per dollar over the next 12 months, according to Timothy Moe, co-head of Asia macro research and chief Asia-Pacific equity strategist at Goldman Sachs.

“We’ve recently firmed up … in particular, our Chinese renminbi forecast from 6.7 to 6.5 on a 12 month view,” Moe told CNBC’s “Squawk Box Asia” on Thursday, adding that it was one of the firm’s “strongest views” for Asian currencies.

In comparison, the onshore Chinese yuan changed hands at 6.7767 per dollar in the afternoon of Asian trading hours on Thursday. Its offshore counterpart traded at 6.7764 per dollar.

That comes as the dollar is in a “structural period of weakening” after being quite strong over the last few years, Moe said. He added that the driver behind this phenomenon was “the loss of U.S. exceptionalism” as factors that previously propped the dollar up, such as relatively better economic growth stateside, have “gone into reverse.”

Both the onshore and offshore Chinese yuan saw a dramatic strengthening this week from levels above 6.8 against the greenback. That came as data from China’s National Bureau of Statistics showed the country’s first positive retail sales report for 2020 in August.

‘Tailwind’ for Chinese stocks

Moe said the strength of the Chinese currency would serve a “tailwind” for stocks in the country.

“Historical evidence is very, very clear that a strengthening currency is generally supportive for the equity market,” he said.

In particular, the more domestic-oriented parts of the market are likely to benefit as the external-facing sectors “become incrementally less competitive” against the backdrop of a stronger currency, the strategist said.

As a result, Moe said a strong Chinese yuan would tend to “tilt” one’s investment focus more toward the domestic part of the economy where the “real kind of juicy stories” — such as the rise of the digital economy, new infrastructure as well as the digitization of the consumption of goods and services —  reside.

“The (yuan) would be just an extra tailwind for those ongoing structural themes,” Moe said.

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U.S. pushes arms sales surge to Taiwan, needling China: Reuters

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Four US-made F-16 fighter jets cross the sky during a drill near the Suao navy harbour in Yilan, eastern Taiwan, on April 13, 2018.

Sam Yeh | AFP | Getty Images

The United States plans to sell as many as seven major weapons systems, including mines, cruise missiles and drones to Taiwan, four people familiar with the discussions said, as the Trump administration ramps up pressure on China.

Pursuing seven sales at once is a rare departure from years of precedent in which U.S. military sales to the island were spaced out and carefully calibrated to minimize tensions with Beijing.

But the Trump administration has become more aggressive with China in 2020 and the sales would land as relations between Beijing and Washington are at their lowest point in decades over accusations of spying, a lingering trade war and disputes about the spread of the novel coronavirus.

At the same time Taiwan’s desire to buy weapons increased after President Tsai Ing-wen was re-elected here in January and has made strengthening Taiwan’s defenses a top priority.

Taiwan is China’s most sensitive territorial issue. Beijing says it is a Chinese province, and has denounced the Trump administration’s support for the island.

Washington has been eager to create a military counterbalance to Chinese forces, building on an effort known within the Pentagon as “Fortress Taiwan,” as Beijing’s military makes increasingly aggressive moves in the region.

Taiwan’s Defense Ministry said the reported package was a “media assumption,” and that it handled weapons purchase talks and assessments in a low-key, confidential way, so could not offer public comment until there was a formal U.S. notification of any sales to Congress.

Taiwan’s military is well-trained and well-equipped with mostly U.S.-made hardware, but China has a huge numerical superiority and is adding advanced equipment of its own.

The weapons packages from Lockheed Martin, Boeing and General Atomics are moving their way through the export process, three people familiar with the status of the deals on Capitol Hill said, and a notification to Congress is expected within weeks.

One industry source said President Donald Trump was slated to be briefed on the packages this week by Secretary of State Mike Pompeo. Some of the deals had been requested by Taiwan more than a year ago, but are only now being moved through the approval process. A State Department spokesman declined to comment.

A senior U.S. official, citing Chinese assertiveness in the Taiwan Strait, said: “There is no equilibrium today. It is out of balance. And I think that is dangerous.”

Trump’s White House has made an here effort to export weapons to U.S. allies trying to bolster their defenses, decrease dependence on U.S. troops while boosting U.S. companies and jobs.

As he fights for re-election on November 3, Trump and Republican supporters have ramped up their rhetoric against Beijing and sought to portray Democratic opponent Joe Biden as soft on China.

Other factors include Taiwan’s bigger defense budget, and the fear in Taiwan that if Trump loses, Biden would be less willing to sell the U.S.’s most advanced weapons to them.

Taiwan’s interest in U.S. weapons and equipment is not new. The island is bolstering its defenses in the face of what it sees as increasingly threatening moves by Beijing, such as regular Chinese air force and naval exercises near Taiwan.

The senior U.S. official said Taiwan’s increased defense spending was a good step, but it had to do more.

“Taiwan, frankly, needs to do more in order to ensure that they indigenously have an ability to deter Chinese aggression,” the official said.

Deals

Drones that can see over the horizon for surveillance and targeting, coupled with advanced missiles and coastal defenses that include smart mines and anti-submarine capabilities to impede a sea invasion, have been discussed at the highest levels to make Taiwan more difficult to attack, like a “porcupine.” according to industry and congressional sources.

A Lockheed Martin-made High Mobility Artillery Rocket System (HIMARS), essentially a truck-based rocket launcher, is among the weapons Taiwan wants, people familiar with the negotiations said. Taiwan also seeks to buy sophisticated anti-tank missiles.

In early August, Reuters reported that Washington is negotiating the sale of at least four of its large sophisticated aerial drones to Taiwan for what could be about $600 million.

Also under discussion are land-based Boeing-made Harpoon anti-ship missiles to serve as a coastal defense against cruise missiles.

Other systems include “underwater sea mines and other capabilities to deter amphibious landing, or immediate attack,” Taiwan’s de facto ambassador here to United States said in July.

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Debt default risks rise, but investing opportunities in high-yield, junk bonds

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SINGAPORE — Debt default risks have grown since the pandemic — but there are still opportunities for investors, said William Bohnsack, president of investment firm Oak Hill Advisors.

Some of the sectors that have a higher risk of default include retail, restaurants, airlines, and certain sectors within energy, he told CNBC as one of the attendees of the Singapore Summit, which is being held virtually this year.

“We see that they’re struggling more so than in other parts of the economy. Yields are at very low levels, and default rates are increasing, so that creates challenges even within debt — where investors can find good opportunities,” he said.

“This is not an easy time for any kind of fixed income investor,” Bohnsack concluded.

Still, he said, there are opportunities in high-yield bonds — also referred to as “junk bonds.” They are corporate debt with low credit ratings that offer high returns for investors willing to take the risk of lending to a business with a poor financial record. Junk bonds are seen as a high-risk, high-reward investment.

Oak Hill Advisors is an alternative investment firm that focuses on distressed credit related investments, among others. It has about $42 billion of assets under management in regions including North America and Europe.

Rock and a hard place?

Investors are caught between two “potentially unappetizing” scenarios, Bohnsack said.

He cited the S&P 500 index, where stocks were trading lower at one moment, then swinging to all-time highs the next. On the other hand, Treasurys are at very low levels, with global central banks pushing interest rates lower.

High-yielding credit “sits in the middle,” and have the potential for attractive total returns – provided downsides are protected, he said.

Streets are empty and businesses have been shuttered in Jersey City on April 27, 2020 in Jersey City, New Jersey.

Arturo Holmes | Getty Images

The default outlook for Asia’s high-yield bonds is more favorable than other regions, according to Goldman Sachs Asset Management. In an August report, the investment bank forecast that the default rate for Asia’s high-yield bonds could be at 4%, compared to 8% in the U.S.

Annual 10-year returns for Asia high-yield bonds are at 6.6%, versus U.S. high-yield debt at 5.8%, according to the report.

The iShares High Yield Corporate Bond Index, a popular exchange-traded fund (ETF) that measures investor interest in the junk bond market, plunged in March. But it has rapidly shot up since then to trade around 26.5% higher since those lows.

“Credit in this environment is seeing a lot of interest from investors … we see opportunity today,” Bohnsack said.

Distressed debt

In particular, there have been opportunities in distressed debt.

Earlier this year, he said, there were opportunities “to buy good companies at distressed prices.”

“Certainly through the March and April time period, we saw pronounced selloff in the secondary market of good companies … with just a bit too much debt,” he said. “We saw significant selloff in high-yield and leveraged loans.” He said his company stepped forward to invest about $2 billion to $3 billion dollars during that period.

That market has now traded back up in the past couple of months, he said.

Bohnsack added: “We’re seeing, I’ll say, an even bigger trend … of larger companies, particularly in the United States, companies in the billions (of) dollar of enterprise value, market leading companies … coming to our market for financing because they may not want to use the syndicated markets, they may not find that the banks are there for them.”

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Buffett’s Berkshire Hathaway just made $800 million on Snowflake’s IPO

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