by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with more news of distorting, state-led policies in China and how they are affecting investors.  We next review a range of other international and US developments with the potential to affect the financial markets today, including new moves by Australia to subsidize its nickel miners, indications the European Union is set to subsidize its defense companies, and new research showing US companies still aren’t hiring many more applicants without college degrees, despite today’s labor shortages.

China:  After years of excess investment and debt financing for housing construction, the Chinese Communist Party is reportedly developing a plan for the government to take over swaths of China’s residential real estate and convert it to subsidized low-income housing.  Such a plan would be in sync with General Secretary Xi’s desire for the Communist Party and the government to have more control over the economy, but it’s not clear how those entities would get control over the assets currently owned by private developers.

• Separately, investors continue to step back from Chinese assets as they increasingly realize the economic and financial market headwinds arising from Xi’s statist policies and other structural challenges.
• All the same, some investors are looking for ways to keep some indirect exposure to China so they can take advantage of any rebound in its economy. New research suggests that one way investors are trying to do that is by buying shares in European luxury goods companies, which get more than one-quarter of their profits from China on average.

India:  Despite government efforts to stop them, thousands of farmers continue to march on the capital of New Delhi to demand minimum crop prices and debt service moratoria.  The continued protests are increasing the political risk for Prime Minister Modi, who currently leads the opinion polls ahead of the national elections scheduled in the coming weeks.

Australia:  The government has formally designated nickel as a “critical” commodity, making the nickel industry eligible for support from a $3.9-billion stimulus fund and for other steps to protect it from the current glut of low-cost Indonesian nickel.  Australian nickel miners have also been struggling with the price-deflating impact of softening demand for electric vehicles since nickel is a key component of many EV batteries.

United Kingdom:  The Conservative Party of Prime Minister Sunak yesterday lost two parliamentary by-elections.  Adding to the pain for the Conservatives, both seats had been considered safe.  The results highlight the continuing unpopularity of the Conservatives, who continue to trail the resurgent Labour Party ahead of elections expected this autumn.

European Union:  In an interview with the Financial Times yesterday, European Commission President von der Leyen threw her support behind the idea of having Brussels subsidize European defense companies to help them boost their productive capacity in the face of rising threats from Russia and beyond.  As we’ve been arguing, increasing geopolitical tensions look set to spark a long-lasting rise in Western defense budgets, creating greater opportunities in Western defense-industry firms, as well as tech or other firms with a lot of defense business.

Russia:  Officials today said anticorruption campaigner and opposition leader Alexei Navalny died in the Siberian prison where the government of President Putin had been holding him.  The authorities claim the cause of death hasn’t yet been determined.  However, given the convenient timing of Navalny’s death, right before Putin faces the next presidential election in mid-March, it would not be surprising if Putin finally decided he couldn’t accept the risk of having a gadfly like Navalny around.  Navalny’s death will likely exacerbate Russian tensions with the West.

United States-Russia:  The White House confirmed yesterday that it has “troubling” intelligence showing that Russia is developing an advanced anti-satellite weapon, as flagged a day earlier in a message to Congress from the chair of the House Intelligence Committee.  As we reported in our Comment yesterday, the weapon appears to be nuclear in nature, so it could signal that Russia is preparing to break out of an international treaty banning the deployment of nuclear weapons in space.  In any case, the new weapon will further raise US-Russian tensions.

US Labor Market:  Despite today’s labor shortages and companies’ insistence that they are trying to loosen hiring requirements for college degrees, new research shows that even when those requirements are lifted, companies don’t hire many more non-degreed workers.  The research suggests several factors are limiting the progress, from automated screening tools that favor college graduates to the difficulty of changing hiring managers’ beliefs about the value of a degree.

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