Asia Tea Time - Cup 19 ☕

July 14, 2023 • Estimated Reading Time: 6 minutes

This week, I cover news on the Asian stock market, Cathay Pacific, and Microsoft's deal for Activision.

Macro in Asia

Asian stock markets rally on weaker US inflation

Asian markets rallied over the past week as lower US inflation data helped spur stock market gains across the board.

Why it’s happening

  • Lower US inflation data is great news – mainly because it means the US Federal Reserve may be close to finishing hiking those pesky interest rates.

  • US interest rates affect everybody, including Asia, as more expensive borrowing impacts companies and individuals.

  • Markets watch data points – like inflation and employment numbers – like a hawk to sense where the Fed is going with its interest rate policy.

Why it matters

  • If there’s light at the end of the interest rate hike tunnel, then stock markets will treat that as good news.

  • That’s mainly because lower borrowing costs and a potentially weaker US dollar will allow money to flow back into Asian markets.

What’s next?

  • The US Federal Reserve’s FOMC meeting takes place 25-26 July, where it’s widely expected that interest rates will be raised by 0.25%. After that, the hope is that there’s only more rate hike to go.

Tim’s Take

Stock markets everywhere are looking at what US Federal Reserve Chairman Jerome Powell will be saying later this month.

While the Fed paused on hikes last month, the resolve to get inflation in the US back down to 2% means a few more rate hikes are likely still to happen.

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The big positive for Asian markets out of this has been the weakening of the US dollar, which has hit its lowest point in nearly 15 months.

A lot of debt that companies take on is either tied in some way to US interest rates or is perhaps denominated in US dollars. A weaker dollar will make life easier for individuals and companies outside the US.

Company spotlights

Cathay Pacific flying high again as it forecasts big profits

Hong Kong’s flagship airline, Cathay Pacific Airways Ltd (SEHK: 293), is forecasting a first half 2023 profit of HK$4.5 billion (US$575 million) as the airline rebounds in the post-pandemic environment.

Why’s it news?

  • The past few years have been tough for Cathay, which has seen record losses as Hong Kong stayed effectively shut for over two years.

  • Cathay also received a major bailout from the Hong Kong government, receiving HK$40 billion as part of a rescue plan during the early days of the Covid-19 pandemic.

Why it matters?

  • Hong Kong is aiming to rebuild itself as an aviation hub in Asia, with Cathay at the heart of that effort. Singapore, along with Singapore Airlines, has had a strong head start as the city state opened up much earlier.

  • As Cathay is behind Singapore Airlines in terms of opening up, there could be potentially more of a boost in its share price too. Cathay’s share price finished the week up nearly 5% on the news.

What’s next?

  • Investors will be watching the exact numbers more closely when Cathay Pacific reports its earnings next month.

Tim’s Take

Airlines have suffered immensely during the Covid-19 pandemic. But like Singapore Airlines, even before that, airlines were never good investments.

That’s because they’re highly cyclical – as in they rely on the economic cycle for good times – and if times are bad, they’re REALLY bad.

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That tends to result in lumpy revenue growth and profits, which ebb and flow with the travel cycles.

Case in point – Cathay Pacific shares have lost over 30% of their value during the past 13 years. Airlines are great for getting from point A to point B. For long-term investing? Not so great.

Tim’s money tip of the week

When we invest into mutual funds, which are actively managed, the one key factor that tends to get buried – under slick marketing material – is the cost.

But that’s crucial because costs can erode your long-term investment returns. Many mutual funds out there charge close to 1.5% per year to manage you money.

Yet a lot of investors aren’t entirely sure if they’re getting the return they’re entitled to. That effectively means your return after costs.

That’s because studies have shown most active managers don’t outperform a simple benchmark index.

So, the next time you’re thinking of buying a fund, first compare its 1-, 3-, and 5-year performance (net of fees) versus the S&P 500 Index’s returns.

You might be surprised to find that just investing in a plain ETF will leave you better off.

Story of the week

Microsoft’s deal for gaming company Activision Blizzard was waived through this week by a US judge, much to the chagrin of the Federal Trade Commission (FTC).

The US$69 billion blockbuster deal is set to have a big impact in the world of cloud and mobile gaming.

However, investors shouldn’t call it a sure thing just yet. Remember that the UK’s regulator – the CMA – initially blocked the deal so for it to go through there may have to be further concessions made by Microsoft.