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Daily Intelligence Briefing

Tuesday, October 1, 2019

Identifying Change-Driven Investment Themes - Five sections, explained here.

I. Today's Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

PayPal Breaks Ground in China, Generating Opportunities in a Massive Payments Market →

Summary: PayPal has become the first foreign company to obtain a payments license in China, which could be a sign of things to come for Visa, Mastercard, and other international payment powerhouses who have been trying to break into the Chinese market for years now. The Chinese government appears to be signaling a further loosening of financial market restrictions for no-domestic firms. If this continues, China could offer even more lucrative benefits for companies than what has been seen in India over the last couple of years. Read more +

II. Updates of Themes on MRP's Radar

Follow-up analysis of key market drivers monitored by MRP.

Retail: Here’s why the Forever 21 bankruptcy could be really bad news for US mall owners

Trade War: The WTO will reportedly give Trump a green light to slap tariffs on a record $7.5 billion worth of EU goods this week

Airlines: Boeing Max Buyer Flydubai Says Grounding Has Set It Back 5 Years

Aluminum: New aluminum batteries for renewables storage

Oil: OPEC’s September Oil Production Falls To Near Decade-Low

III. Joe Mac's Viewpoint

Founder Joe McAlinden’s big-picture analyses of macro issues. More about him here.

August 30, 2019: The Booming Buck →

July 26, 2019: Spiking the Punch Bowl →

June 28, 2019: A Review of MRP's Change-Driven Themes →

June 7, 2019: India's "Watchman" Keeps His Post →

IV. Active Thematic Ideas

MRP's active long and short themes, with an archive of follow-up reports.

See Them Here →

V. Macroeconomic Indicators

Key data releases relevant to MRP's Active Thematic Ideas.

See Them Here →

TODAY’S MARKET INSIGHT

PayPal Breaks Ground in China, Generating Opportunities in a Massive Payments Market

Summary: PayPal has become the first foreign company to obtain a payments license in China, which could be a sign of things to come for Visa, Mastercard, and other international payment powerhouses who have been trying to break into the Chinese market for years now. The Chinese government appears to be signaling a further loosening of financial market restrictions for no-domestic firms. If this continues, China could offer even more lucrative benefits for companies than what has been seen in India over the last couple of years.

PayPal has become the first foreign company to acquire a payments license in China, after purchasing a 70% stake in Chinese payments group GoPay, approved by the country’s central bank. Although American Express has been providing foreign payment services in China since last year, it was only allowed through a 50-50 partnership with a domestic company. The Chinese market is a crucial one for US payments firms as, according to eMarketer, 76% of Chinese smartphone users made a mobile point-of-sale purchase in 2017, compared with 25% of American users. In total, 61.8% of all such transactions globally are Chinese.


Paypal’s expansion is a big step in the broader opening of Chinese financial markets for foreign investors as the country sees it “necessary to further expand the high-level two-way opening of the financial industry, encourage overseas financial institutions and funds to enter the domestic financial market”, according to the Financial Stability and Development Committee of the State Council. Comprehensive reforms to open markets further are likely to be hastened going forward following recent reports that Trump administration officials are considering ways to limit U.S. investors’ portfolio flows into China.


Asia is currently the world’s most lucrative battleground for digital payments. Back in 2017, MRP highlighted PayPal’s expansion into India, another market experiencing exponential growth in payments and other electronic financial services. Revenue from PayPal’s business in the country grew twelvefold during the 2018 fiscal year to reach $37 million, up from just $3 million during the previous year. That is only a small sliver of the payments industry in India as an Assocham-PWC India study recent predicted digital payments in India will more than double to $135.2 billion in 2023 from $64.8 billion this year, and Credit Suisse projects the overall Indian payments market to be worth $1 trillion over the same period. Google launched its Google Pay app in the country in 2017, built on top of Indian government-backed UPI payments infrastructure, and boasts 67 million monthly active Indian users worth $110 billion in revenues in the last year.


China’s payments ecosystem is already much larger than India’s, but is expected to see huge growth in coming years nonetheless. And now, Western companies like PayPal, Visa, Mastercard, and others will be joining the mad rush to break off a piece. The latter two firms are among the many foreign companies that have been kept waiting for license approvals for years now. but hopefully the latest Chinese efforts to globalize their markets should finally expedite the process.


The CSI fintech theme index, an index tracking major financial technology firms, has gained more than 50% so far in 2019, far outperforming the broader market.


The Financial Time notes that third-party online payments in 2018 grew 45% in value to $29 trillion from the year before. On the mobile payments side, the market is expected to grow 21.8%, from 2017 to $96.73 trillion in 2023, driven partly by increasing demand for e-commerce, a report from Frost & Sullivan found. The market has also seen an increase in cross-border transactions, particularly in sectors like e-commerce, travel and overseas education. These reached $6.66 trillion in 2016. The report additionally said the total number of active mobile payment customers is expected to reach 956 million by 2023, up from 562 million in 2017.


While those numbers are impressive, it won’t necessarily be so simple for foreign firms to break power Chinese firms already hold over the space.


Alipay and WeChat are expected to earn 40% of all payment fees within China per year by 2020. Additionally, the typical domestic payments fee rate of 0.5 per cent, which is lower than the international average of 1.5 to 2 per cent. As of June 2019, Alipay counted over 900 million annual active users in China. Better yet, they’re extremely active; 80% used at least three different kinds of service offered by Ant Financial, a financial affiliate of Alibaba Group, from the wealth management to the insurance and credit/microfinancing services. More than 8 million brick-and-mortar stores in China accept AliPay.


Digital currencies could also speed the development of payments in China as the country’s government seeks to be the first to issue such an asset. In mid-September, MRP outlined the People’s Bank of China’s (PBOC) development of a digital, “stablecoin” version of the Yuan. While Mu Changchun, previously deputy director of the People’s Bank of China’s payments department (and now head of the PBOC’s digital-currency research institute), announced that an official Chinese digital currency was “almost ready” in August, and some believed it would go live as soon as Nov. 11, coinciding with Singles’ Day, a popular Chinese shopping holiday. The PBOC denied having set any date for an imminent release of the digital Yuan, but the country is likely racing to beat Facebook’s Libra to the punch.


While it will take some time for non-Chinese payment firms to make their mark in China, the strong results we can already observe in new services and investments in India is evidence that companies like PayPal, Visa, Mastercard, Google, and others will eventually begin breaking off larger pieces of market share and bolstering their earnings.

PayPal (PYPL) vs Alibaba (BABA) vs Tencent (TCEHY)

vs Payments (IPAY) vs S&P 500 (SPY)

Source material for today's market insight...

Payments

PayPal to enter China through GoPay acquisition


The People’s Bank of China has approved PayPal’s acquisition of a 70% equity state in GoPay (Guofubao Information Technology Co. [GoPay], Ltd.), which will make PayPal the first foreign payment platform to provide online payment services in China.


U.S. firms in the financial services market have for a long time struggled to enter China. Notably, American Express became the first U.S. card network to gain permission to set up card-clearing services in China last November, and Mastercard this year said it would try to set up a joint venture with another local player to gain entry.


PayPal said the transaction is expected to close in Q4 2019 and is subject to customary closing conditions.


Read the full article from TechCrunch +

Payments

Chinese Mobile Payments Titan Ant Financial Offers Investor Day Insights


Ant Financial demonstrated just how big Alipay really is, posting a 20 percent growth in the six months as of December 2018. Between Alipay proper and its various “local e-wallet partners,” a total of 1.2 billion users worldwide is now being reached. Since Alipay launched its globalization strategy back in 2016, the coalition saw an overall growth of 260 percent in just the last three years.


Ant Financial has been actively considering the future and has determined blockchain will be a major part of things. Thus, it’s been opening up its studies on blockchain to various potential and current partners, including banks, insurance companies, and even elements of the government to help find ways to improve efficiency and reduce costs with the still-new technology.


Ant Financial demonstrated just how big Alipay really is, posting a 20 percent growth in the six months as of December 2018.


Read the full article from Payment Week +

Payments

China's fintech stocks buoyed by Beijing's digital currency push


The CSI fintech theme index, an index tracking major financial technology firms, has gained more than 50% so far in 2019, far outperforming the broader market. Among the big gainers are Beijing Certificate Authority , which mainly provides electronic authentication services; its share price hit a record high this month after having soared nearly 200% this year. 360 Security Technology Inc , China’s biggest network security services provider, has seen its shares jump more than 50%.


Investors have rushed to buy into fintech firms this month despite no clarity on when Beijing will launch its digital currency. Yi Gang, the central bank governor, has said the PBOC does not have a timetable for rolling it out.


“We believe the PBOC would probably continue to use the current infrastructure of commercial banks, while the most important carrier of personal digital currency would be mobile phones,” Soochow Securities noted in report. The brokerage said the digital currency related industry chains would include circulation operation service providers, banking IT service providers and core service providers of e-wallets.


Read the full article from Reuters +

Payments

Google chases businesses to maintain its payments lead in India


Google said today it is bringing its mobile payments app — Google Pay — to businesses in India as the Android-maker rushes to maintain its payments lead in one of its key overseas markets before its global rival Facebook sets off a similar play in the nation.


“India has more than 60 million small and medium-sized businesses, however only a fraction of them support digital payments. Imagine the transformation that is possible if more of these merchants could access payments online,” said Ambarish Kenghe, director and product manager for Google Pay. The company is also bringing a feature that will enable users to discover entry-level and white-collar jobs through the Google Pay app.


The payments market in India — which is projected to be worth $1 trillion by 2023, according to Credit Suisse — is becoming aggressively crowded and competitive.


Google also announced that it is bringing tokenized cards for debit and credit cardholders in India, which will allow them to pay for things using a digital token instead of their actual card number.


In the meantime, Paytm is working to expand its reach in the nation, too. The company, which posted a yearly loss of over $500 million last year, said earlier this month it intends to invest another $3 billion into its business in the next two years.


Read the full article from TechCrunch +

You'll find all of our recent Market Insight reports on the MRP website →

ACTIVE THEMATIC IDEAS

Select a theme to see when and why we added it. Also included is a link to all recent Market Insight reports we've written about that theme, allowing you to track its progress.

LONG

Agricultural Commodities

SHORT

Aviation

LONG

Refiners

LONG

Silver Miners

LONG

Video Gaming

SHORT

Airlines

LONG

CRISPR

LONG

Robotics & Automation

LONG

Solar

LONG

Vietnam

SHORT

Autos

LONG

Electric Utilities

LONG

Silver

SHORT

U.S. Pharmaceuticals

LONG

3D Printing

MACROECONOMIC INDICATORS

1.

United States Chicago PMI Declines


The MNI Chicago Business Barometer in the US decreased by 3.3 points to 47.1 in September 2019 from the previous month's 50.4, well below market expectations of 50.2. Production saw the largest decline, falling by 7.6 points to 40.4, the lowest since May 2009; and New Orders was down 7.6 points to 48.5, shifting back into contraction. Also, Order Backlogs fell by 4.5 points to 46.8 in September; and Inventories slipped further to a 40-month low of 41.7.


Click here to access the data +

2.

Spain Q2 GDP Growth Weakest in 3 Years


Spain’s economy advanced 0.4 percent on quarter in the three months to June 2019, below a preliminary estimate and market expectations of 0.5 percent and following a 0.5 percent expansion in the previous period. It was the weakest growth rate since the second quarter of 2016, as government spending slowed, fixed investment shrank and household consumption stalled. Net trade contributed positively to growth.


On an annual basis, the GDP expanded 2 percent, following a downwardly revised 2.2 percent growth in the previous quarter and down from a flash estimate and market forecasts of a 2.3 percent gain.


Click here to access the data +

3.

UK Q2 GDP Annual Growth Revised Higher


Britain's gross domestic product expanded 1.3 percent year-on-year in the second quarter of 2019, slightly above a preliminary estimate of 1.2 percent and compared to a revised 2.1 percent growth in the previous period . It has not been weaker since the first three months of 2018.


Click here to access the data +

4.

German Inflation Rate Drops to 1-1/2-Year Low


The inflation rate in Germany is expected to ease to 1.2 percent year-on-year in September 2019 from 1.4 percent in the previous month, missing market expectations of 1.3 percent, a preliminary estimate showed. That would be the lowest inflation rate since February 2018.


Click here to access the data +

5.

Italy Jobless Rate Drops to Lowest Since 2011


The seasonally adjusted unemployment rate in Italy fell to 9.5 percent in August of 2019 from a downwardly revised 9.8 percent in the previous month and below market expectations of 9.9 percent. It was the lowest jobless rate since November of 2011.


Click here to access the data +

6.

Japan Housing Starts Down


Housing starts in Japan declined by 7.1 percent year-on-year in August 2019, compared to the previous month's 4.1 percent drop and market consensus of a 6.1 percent fall.


On the other hand, new construction starts for built for sale grew faster (5.6 percent vs 5.1 percent), due to a sharp rebound in collective housing (11.1 percent vs -1.1 percent) and a further rise in detached houses (2.4 percent vs 8.9 percent).


Click here to access the data +

MARKET INSIGHT UPDATES: SUMMARIES

Markets

Retail

Here’s why the Forever 21 bankruptcy could be really bad news for US mall owners


Forever 21 on Sunday night announced it was filing for Chapter 11 bankruptcy, planning to close nearly 200 locations in the U.S. Forever 21 has 815 stores globally, and expects to exit most of its locations in Asia and Europe. Forever 21′s filing comes amid a wave of announced store closures in the U.S., many of them in shopping malls, which are set to eclipse a record this year. So far in 2019, major retailers announced plans to shutter 8,558 stores in the U.S., while opening 3,446, according to a tracking by Coresight Research. Last year, there were 5,844 closures and 3,258 openings, Coresight said. The firm is anticipating announced closures could top 12,000 this year, marking a new high.


Brookfield in its latest annual report lists Forever 21 as its fifth-biggest tenant in terms of rent exposure, accounting for 2.2% of minimum rents. Taubman’s latest annual report lists Forever 21 as the No. 1 tenant in terms of square footage, with 17 stores.


The average Forever 21 store is close to 40,000 square feet but there are some locations that span more than 100,000, which is more like the size of a traditional department store. Larger locations can prove to be much more difficult to fill.


Read the full article from CNBC +

Politics & Policy

Trade War

The WTO will reportedly give Trump a green light to slap tariffs on a record $7.5 billion worth of EU goods this week


The World Trade Organization will reportedly give the US the green light this week to slap tariffs on about $7.5 billion worth of EU goods, according to Reuters, citing people familiar with the case.


The global trade watchdog is set to grant the record level of retaliation rights after finding European planemaker Airbus and American archrival Boeing received billions of dollars in illegal subsidies, Reuters said. European government officials expected the US to be awarded between $5 billion and $7 billion in retaliation rights


The Trump administration is likely to pull the trigger with the WTO's backing, current and former US officials told Reuters.


Read the full article from Business Insider +

Services

Airlines

Boeing Max Buyer Flydubai Says Grounding Has Set It Back 5 Years


Flydubai, the second-biggest customer for Boeing Co.’s grounded 737 Max jetliner, warned that its operations will shrink to 2014 levels if the model doesn’t return to service soon. The company reported a loss of 197 million dirhams ($54million) in the first-half.


Flydubai pulled 14 Max planes when the Max was grounded, and while Boeing reckons it will get the plane flying again this year, the United Arab Emirates aviation authority has said it doesn’t foresee a return before 2020. The airline, which has ordered 251 of the jets, is seeking compensation and suggested that it could switch to Airbus SE’s rival A320neo.


Passenger numbers dropped 7.5% in the half as capacity fell by twice that degree, exacerbated by the return to lessors of five aircraft, FlyDubai said. Another four will go back before the end of the year.


Global revenue losses from grounding are likely to total $1.5 billion, assuming the Max returns to service by the end of the year, according to Atmosphere Research Group.


Read the full article from Bloomberg +

Commodities

Aluminum

New aluminum batteries for renewables storage


Scientists from Sweden’s Chalmers University of Technology and Slovenia’s National Institute of Chemistry say they have created aluminum batteries with higher energy density and potentially wide renewable energy storage applications.


Compared to typical aluminum batteries, which use an aluminum anode and graphene cathode, the new device features an organic, nanostructured cathode made of carbon-based molecule anthraquinone. In the paper Concept and electrochemical mechanism of an Al metal anode ‒ organic cathode battery, published in Energy Storage Materials, the researchers explained anthraquinone enables storage of positive charge-carriers from the electrolyte, ensuring their device has twice the energy density of conventional aluminum batteries.


Aluminum in principle works better than lithium-ion as a charge carrier, according to the research group.


Read the full article from PV Magazine +

Energy & Environment

Oil

OPEC’s September Oil Production Falls To Near Decade-Low


OPEC’s oil production has fallen to a near decade low for September, according to the latest Reuters survey, falling below 29 million barrels per day, with Saudi Arabia accounting for most of the output drop.


That’s a decline of 750,000 barrels per day on average, mostly from the decrease in oil production from OPEC heavyweight Saudi Aramco after its facilities were struck in an attack that Saudi Arabia and the United States has pinned on Iran.


Saudi Arabia’s output was 700,000 bpd lower in September compared to August, at 9.05 million bpd, which it achieved by releasing oil barrels from inventory. According to the survey, Saudi Arabia’s production came in between 8.5 million bpd and 8.6 million bpd. Other production decreases came from Venezuela as it struggles under growing oil inventories as more and more shippers refuse to transport the sanctioned country’s crude.


Read the full article from OilPrice +

ONLINE RESEARCH PORTAL

MRP’s Research Portal includes an archive of current and past Market Insights, Active Thematic Ideas, and Joe Mac’s Viewpoints. You can also search for all of our coverage on any sector or industry either by selecting Research Sectors or by entering a keyword such as “oil”, “housing” or “inflation” into the search bar at the top right of the page.


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ABOUT THE DIBS AND MCALINDEN RESEARCH PARTNERS


McAlinden Research Partners (MRP) publishes daily and other periodic reports on the economy and the markets.


MRP focuses on identifying change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP's compilation of articles and data from multiple sources on subjects reflecting change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics.

The information provided in this Report is not to be reproduced or distributed to any other persons. This report has been prepared solely for informational purposes and is not an offer to buy/sell/endorse or a solicitation of an offer to buy/sell/endorse Interests or any other security or instrument or to participate in any trading or investment strategy. No representation or warranty (express or implied) is made or can be given with respect to the sequence, accuracy, completeness, or timeliness of the information in this Report. Unless otherwise noted, all information is sourced from public data.


McAlinden Research Partners is a division of Catalpa Capital Advisors, LLC (CCA), a Registered Investment Advisor. References to specific securities, asset classes and financial markets discussed herein are for illustrative purposes only and should not be interpreted as recommendations to purchase or sell such securities. CCA, MRP, employees and direct affiliates of the firm may or may not own any of the securities mentioned in the report at the time of publication.

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