November 08, 2019

Real quick: Today's Female Friday edition of Axios Markets is for my mom. It was her 29th birthday again yesterday (truly amazing!) and as her proud son, she has shown me that women can do anything.

About Female Friday: Every month since April I have written a newsletter that quotes women and only women on the first Friday of the month (except last month and this month when it was the second Friday of the month).

Situational awareness:

  • Coming up on “Axios on HBO”: The life-changing costs of being a whistleblower according to five who risked it all (sneak preview); Uber CEO Dara Khosrowshahi discusses the company’s goals for profitability; and an exclusive poll on America’s surging political anger. Tune in Sunday at 6pm ET/PT. 

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(Today's Smart Brevity count: 1,075 words, ~ 4 minutes.)

1 big thing: China's mainland stocks outpace the world

Illustration: Eniola Odetunde/Axios

China's economic growth has weakened to the slowest pace in nearly three decades this year, the result of a gradual shift to a new economy and a damaging trade war with the U.S.

  • But its mainland stock market, made up of largely domestic-facing companies, is having a banner year — in fact, it's been the best performing major stock index in the world.

What's happening: China's onshore stocks, dubbed A shares, have delivered more than 37% total return for investors this year, based on the FTSE A share 200 index, FactSet data show.

  • The A shares' return has towered over other regional markets and the U.S. in spite of the trade war and continued unrest in neighboring Hong Kong.

By the numbers:

  • China's benchmark Shanghai Composite Index has risen 19% year to date
  • Japan's Nikkei has gained 18%
  • MSCI's index of Asian shares, excluding Japan, has risen 13%
  • Hong Kong's Hang Seng is up 8%
  • The S&P 500 has gained 23%

What they're saying: China's A shares have been able to shine in large part because they reflect the growth of the Chinese private sector and middle-class consumers, Asha Mehta, senior portfolio manager at Acadian Asset Management, tells Axios.

  • "The underlying companies in the A share market are broadly quite different and the investors are very different," Mehta says, noting that 80%-85% of investors in the market are retail, rather than institutional investors.
  • Acadian was one of the first U.S. asset managers granted a license to trade China's onshore market locally in March 2018 and one of the first to develop a fund dedicated to the onshore market.

What it means: China's A shares also have gotten a big boost from the country's deregulation and market liberalization initiatives, the Chinese government's stimulus measures and particularly from increased weighting in MSCI's emerging markets index.

Yes, but: A major reason Chinese securities had previously been excluded from many global benchmarks, including MSCI, is that they have been prone to speculative activity, alleged government interference and a lack of governance.

The bottom line: China has the second-largest stock market in the world and is growing fast, but mainland Chinese stocks are still owned by very few outside China.

  • Despite continued tension, and congressional attempts to block American investment in Chinese securities, if A shares continue to perform like they have this year, they will likely see significant inflows.

Bonus: A shares have been a cut above in 2019

Data: FactSet; Chart: Axios Visuals

China's A shares may have further to go, as inclusion in MSCI's emerging markets index has been a major driver of inflows and more stocks are set to be added.

  • MSCI announced Thursday that it would increase the A shares' weight in the EM index to 4.1%, drawing billions of dollars from both passive and active fund managers to the stocks.
  • After adding Chinese stocks to its global benchmarks in 2018, following years of deliberations, MSCI says it plans to increase A shares’ weighting to 20% of the index soon.
  • The MSCI EM index is tracked by around $2 trillion of funds.

Why it matters: MSCI inclusion is seen as a stamp of approval from the investment community that equities are safe.

  • If and when A shares are fully included in MSCI's indexes, a full 40% of the MSCI Emerging Markets Index would be made up of Chinese stocks.
  • Mehta tells Axios she thinks it could rise to an even higher level, potentially up to 50%.

2. Lawmakers push back on noncompete agreements

The U.S. Senate may soon be taking on noncompete agreements, after a rare bipartisan bill to declare them illegal in most instances was introduced and has gained support.

What it means: The Workforce Mobility Act would ban the use of noncompete agreements except in connection with the dissolution of a partnership or the sale of a business.

Why it matters: Previously a rare clause, companies have recently been instituting noncompete agreements into the contracts of "janitors, receptionists, customer service workers, fledgling journalists, even employees of a day care center," according to analysis from the Economic Policy Institute.

  • A 2015 study found that 40% of Americans have had a noncompete agreement at some point in their careers.

The big picture: "Workers’ inability to leave their jobs because of non-compete agreements and similar limitations has also contributed to the wage stagnation of recent decades," legal experts Jane Flanagan and Terri Gerstein write for EPI's Working Economics blog.

  • "Two studies released just last month found that non-compete agreements adversely affected wages and job mobility."
  • "Non-compete agreements aren’t really about trade secrets anymore. They’re about limiting workers’ bargaining power."

3. CEO-consumer confidence gap rises to an all-time high

Data: The Conference Board, shared by Deutsche Bank Securities; Chart: Axios Visuals

Over the course of the year, U.S. consumers have remained confident about the economy while CEOs have grown more uncertain.

  • In the third quarter, the confidence gap between the two groups increased to its highest level on record, analysis from Deutsche Bank Securities showed.

4. Disney strikes key deal with Amazon ahead of Disney+ launch

After beating earnings estimates on the top and bottom lines, Disney announced it had reached a deal with Amazon to put Disney+ on Amazon Fire TV devices, and on Samsung and LG televisions.

Why it matters: Axios' Sara Fischer writes: A streaming distribution partnership between Amazon and Disney seemed uncertain after it was reported last month that the two companies were at odds over advertising terms.

  • Amazon's Fire TV stick is the second-largest TV app distributor next to Roku. Disney needs that distribution outlet to hit its lofty subscriber goals.

The big picture: Disney's banking its future on its new streaming initiatives.

Sara's thought bubble: Where Disney will be most competitive is its content offering and competitive pricing. Disney+ costs less than Netflix and Amazon Prime and its bundled service will cost the same as Netflix's most popular subscription tier.

Why it matters to the market: Even before the partnership announcement, Disney's stock had risen thanks to the strong earnings report.

  • "At 11%, this beat is really good," Erin Gibbs, president and CEO of Gibbs Wealth Management, told Fox Business after the earnings release.
  • "It's better than you normally see from Disney."

Go deeper: Subscribe to Sara's Axios Media Trends newsletter.

5. Safe havens unwind

Data:; Chart: Axios Visuals

The dollar rose to its highest level in five weeks against the Japanese yen on Thursday, as currency markets also took their cue from seemingly reduced tensions between the U.S. and China.

  • The yen's value against the dollar has declined along with gold, bond prices, and other safe havens this week as the world's two largest economies look poised to rollback tariffs and de-escalate the trade war.

What they're saying: "[F]or now the latest headlines suggest progress towards a meaningful agreement, which is enough to boost risk appetite," Kathy Lien, managing director of FX strategy at BK Asset Management, says in a note to clients.

What to watch: Lien points out that "the restrained rally" in currencies like the Australian and New Zealand dollars that typically perform well when investors favor risky assets, "reflect the market's cautiousness in this headline driven market."

  • "Barring any fresh news that could cast doubt on progress towards a deal, [the dollar] could extend its gains to 110 [yen per dollar]."