From the Securities Lending Trading Desk

As China/US tariffs remain in focus, we continue to see strong demand for several Chinese ADS/ADRs. London-based lender, Standard Chartered Plc., reported operating income of $7.63 billion, which exceeded analyst estimates. Tough times continue for UK housing and retail sectors this week.

Below please find this week’s edition of From the Trading Desk, which provides timely commentary about top security earners, revenue drivers and other factors influencing the securities lending market from the BBH Securities Lending Trading Team.

Americas

As China/US tariffs remain in focus, we continue to see strong demand for Chinese ADS/ADRs. Recently, the POTUS urged a US increase of tariffs on $200 billion of Chinese goods from 10 percent to 25 percent. This week the focus was on several Chinese ADS IPOs: Cango Inc. of Cayman Island – ADR (CANG), Aurora Mobile Limited – ADR (JG), and Pinduoduo Inc. – ADR (PDD). Though cross-border IPOs have been rattled by trade tensions (two of three deals were downsized last week), we are still seeing a surge in their listings. According to Bloomberg, IPOs on US exchanges are set to raise $3.5bn this week and most of this value is from companies based in China.

This week we saw strong demand for Sociedad Quimica y Minera de Chile SA (SQM), a Chilean ADR, as news headlines led to price volatility. SQM fell to a low of $46.15 on 7/23. The decline followed a report from the WSJ that TSLA had asked suppliers to return some of their payments in an effort to turn a profit. As that headline faded, the share price reversed course as investors turned to reports that China had become a large purchaser of lithium hydroxide, a main element in rechargeable batteries. This resulted in shares rallying roughly 4% to $48.27 on 7/31. SQM’s share price has seen turbulence in the past as the price is highly susceptible to decreases in fertilizer production, increases in costs, and changing demand. We anticipate continued demand.

Asia Pacific

Standard Chartered Plc. announced its financial results for the first half of 2018 last week with analysts expressing concern over its spiraling costs despite reporting better-than-expected profit growth. The London-based lender, which has a strong focus across the Asia and EMEA regions, reported operating income of $7.63 billion despite expenses increasing by 6.5 per cent to $5.19 billion, which exceeded analyst estimates. The bank cited that the acceleration of increased investments across the bank contributed to the over-run on expenses and warned that these are likely to remain at similar levels for the rest of the year. In recent weeks we have witnessed a modest increase in securities lending demand for the Hong Kong-listed shares of Standard Chartered, which have declined by 13% this year.

Shares in GungHo Online Entertainment slumped the most in two and a half years after reporting disappointing operating profits for the first half of 2018. The Tokyo-based game maker said operating income for the first half of 2018 fell by 38 per cent to 12.23bn yen ($110 million). This was its fourth straight year of declines, as enthusiasm for its games franchise dissipates. The company has become increasingly reliant on one key game, “Puzzle & Dragons”, and is facing strong pressure to add new content to keep users engaged in the face of stiffening competition from rivals such as Colopl Inc, Mixi Inc, and Sony Corp. We saw strong securities lending demand for GungHo after the announcement of its earnings, with its shares trading 24% lower so far this year.

Europe

Tough times continue for UK housing and retail sectors. House of Fraser was in danger of collapse with 17,000 jobs at risk as a potential buyer pulled out of its plan to buy a 51% stake in the high street brand. Demand for Countrywide (CWD LN) has been strong as the property services group announced poor 1H operating results that were exacerbated by £230M of write-downs. The share price dropped 67% following the announcement, only to recover to ~40% down on last week’s trading levels.

As earning season continues and a certain US tech company hits the historic $1 trillion mark, results continue to drive demand this week. A small pick-up in short interest in Premier Oil (PMO LN) preceded the oil and gas exploration company’s interim earnings announcement in mid-August, where strong growth and accelerated debt reduction are expected. Impala (IMP SJ) saw increased lending demand as the world’s second largest platinum producer announced plans to cut 13,000 jobs and reduce activity to stem losses following platinum’s 38% YTD drop.