ALPHO

Despite the recent short-term gain of the U.S. dollar, mainly due to escalating conflict in the Middle East, the greenback has experienced sustained weakening against other major currencies over the past couple of months. This trend began as interest rate cuts by the Federal Reserve became more likely, resulting in the bigger than expected September cut, coinciding with signs of deterioration in the U.S. economy. Meanwhile, the Chinese government is increasingly trying to assert the yuan’s dominance in global markets. How likely is it to succeed?

Short term USD strengthening

Besides gold and other precious metals, another asset that holds the ‘’safe heaven’’ title among the investors is the U.S. dollar. It is the currency used in majority of global trades and transactions which makes it the most stable and reliable. Tensions in the Middle East have escalated into a wider conflict in recent weeks, prompting many investors to move their funds into safe-haven assets resulting in a sudden surge in the value of USD. The U.S. Dollar Index, which measures the greenback against six major currencies, rose 0.1% to 100.969 on Wednesday, October 2, adding to its 0.5% gain the previous day. It continued to grow throughout the following week, reaching 102 basis points by October 9. However, other forces are also at play.

As US economic indicators over the last couple of months continued to reinforce bets on a September rate cut, the situation finally entered the action phase on September 19, 2024. In the months leading up to that point, the USD gradually weakened against other major currencies, including the EUR, JPY, and CNY. It is expected that the Fed will continue making gradual cuts, and with that prospect, further weakening of the USD might follow — provided that inflation and other macroeconomic factors remain on track.

Performance of U.S. Dollar Index over 5 years. Source: tradingview.com

Chinese yuan set to dominate Asian markets

China has been pushing for the yuan to become an alternative to, or rival USD dollar on the global stage. However, this effort still seems far-fetched, considering that as of last year, the U.S. dollar accounted for a 66% share of global international currency usage, while the yuan held only 2.5%. That said, since the Western sanctions against Russia due to its invasion of Ukraine, the role of CNY in international trade with Russia has become more significant. It has served as a means for countries to offset the impact of potential further sanctions by avoiding financial networks dominated by the U.S. Additionally, when we compare the international usage of the yuan to China’s share of global GDP, it becomes clear that the currency still has substantial room for growth.

China also supports the international use of CNY through various mechanisms, such as establishing 31 offshore CNY clearing banks and launching the Cross-Border Interbank Payment System (CIPS). From 2010 to 2023, the use of CNY for China’s cross-border payments has surged, surpassing the USD for the first time in March 2023. This shift is driven by increased foreign willingness to trade in CNY and bilateral trade agreements, like those with Brazil and Argentina, allowing for CNY-denominated settlements.

What are the prospects of Japanese yen?

Another Asian currency, the Japanese yen, had been losing ground against the US dollar for years, as the Japanese economy struggled with mounting debt. However, the tide may have turned earlier this year when the Bank of Japan put an end to its financial stimulus through negative interest rates and introduced two rate hikes, currently holding borrowing costs at around 0.25%. This prompted the yen to gain some strength in recent months. However, the BOJ's aggressive purchase of government bonds (quantitative easing) was meant to inject money into the economy, keep borrowing costs low, and stabilize the yen's value. Unfortunately, that has led to a shortage of bonds in the market, making trading difficult and pushing yields down, keeping the yen weak. Until recently, JPY was gaining some ground over USD, but Japan's newly elected prime minister expressed reluctance to pursue further monetary tightening, which makes JPY’s further strengthening less likely in the foreseeable future.

Conclusion

While the U.S. dollar has recently strengthened amid geopolitical tensions, its long-term prospects are uncertain due to potential interest rate cuts by the Federal Reserve and signs of economic decline. Meanwhile, China's push for the yuan's internationalization is gaining momentum, aided by trade agreements and a robust clearing network. The Japanese yen, bolstered by recent monetary policy changes, is also showing signs of recovery, however it is unlikely to compete with Chinese counterpart. Overall, the evolving dynamics in currency markets suggest a potential shift away from dollar dominance, with CNY emerging as significant alternative in the Asian markets.

Sources:

The global shortage of semiconductor chips has hugely impacted the world’s economy and there are raising concerns that the crisis will not have been ending up in 2022, Alpho reports. The prices of chips are expected to rise next year, which in turn, bumps the price of the electronic devices they power. In fact, prices of semiconductors have been escalating since the last quarter of 2020.

Known for its cutting-edge technology & quality, TSMC as the market leader is set to hike chip prices by up to 20% according to Wall Street Journal. This price surge would in turn go to the end customer of major technology outlets, such as that of Apple and Samsung. According to Gartner, the worldwide semiconductor shortage is expected to last until the second quarter of 2022.

While there is an array of international chipmaking firms, such as Intel, Broadcom and Nvidia, the vast majority of the semiconductor outsourcing market, also known as the foundry market, is dominated by Asia. In specific, the Taiwanese TSMC (Taiwan Semiconductor Manufacturing) has stolen the spotlight of the foundry market, which regards major tech giants including Apple, Qualcomm and Nvidia as its clients. In fact, TSMC accounted for 54% of the total foundry revenue on a global scale in 2020. The chart below, provided by TrendForce, exhibits the global market share of semiconductor contract manufacturers:

· TSMC: 54%

· Samsung: 17%

· SMIC: 6%

· Others: 14%

Adding up the figures, Asia clearly takes over the semiconductor chip playfield, accounting to 87% of the world’s total chip exports. The supernation is clearly Taiwan, with many companies outsourcing their chip manufacturing to the Asian nation.

However, it still is not clear whether the Asian dominance on the chip world will diminish, despite major investment plans from non-Asian makers such as Intel in scaling up production, in attempt to capture some of the Asian-dominated market share.

What are Semiconductors?

To get into the nitty gritty of it, semiconductors are silicon-made material products which conduct electricity more than an insulator, such as glass or wood, but less than a pure conductor, such as aluminum or steel. Semiconductors act like tiny electronic switches which run computations inside technology products. This sophisticated creation is found in thousands of electronic products, from gaming consoles and microwaves to datacenters powering the internet.

Lack of Semiconductors & The Impact of Chip Shortages

On a global scale, there has been a recent lack of semiconductor chips as automaker factories were forced to halt production amid the spread of COVID-19. This resulted in a big fraction of the workforce beginning to work from home, causing an explosive burst in demand for devices, and such demand was beyond what manufacturers could provide.

The semiconductor shortage has impacted many industries, especially the auto industry. This means delayed car delivery orders, and limited supply. Recently, Japanese automakers reported tumbling sales in China as the chip shortage hit vehicle production hard. Honda’s car sales in China for September were down 28% from the figure a year earlier, Nissan realized a 26% drop in September China-sold cars and Toyota witnessed a 36% decline. The semiconductor shortage has also hit many other industries, such as the smartphone world. Apple recently announced that they will likely slash production of its iPhone 13 by up to 10 million units due to the global chip drought, as chip suppliers including Broadcom and Texas Instruments are struggling to meet the overwhelming semiconductor chip demand.

Lưu Đỗ Hoàng Anh, Alpho Financial Analyst

Licences and Authorisation:

Alpho is a brand of Gulf Brokers Ltd. a limited liability company regulated as a Securities Dealer by the Seychelles Financial Services Authority of Seychelles (“FSA”) with license number SD013 to carry out certain categories of financial investment business as permitted under the Seychelles Securities Act 2007.

Risk Warning:

New registrations of electric vehicles in Europe took the lead in 2020, when 1.4 million of them were registered. It's more than double compared to registrations in 2019. Last year, nearly 1.2 million electric cars were registered in China and less than 300,000 in the United States. Fully electric or plug-in hybrid cars thus reached a record year, while the global conventional car market failed due to the Covid-19 pandemic in 2020, Alpho summarizes in its report.

The largest fleet of vehicles with electric motors can still be found in China, where there are around 4.5 million of them. In Europe there are around 3.2 million electric cars, while there are roughly 1.7 million of them in the United States.

The share of electric vehicles in new registrations in Europe soared up to ten percent, compared to 3.2 percent reported a year earlier. Chinese registrations increased by about 13 percent. However, a decrease of about nine percent was reported in the US. The number of new registrations of electric cars in the USA has been declining continuously since 2018, when, on the contrary, there was a year-on-year growth of more than 80 percent.

Past year was quite contradictory for car manufacturers. Global sales of conventional combustion vehicles fell by 16 percent as a result of the Covid-19 pandemic, although second half of last year saw a recovery after massive declines, especially in the second quarter.

In contrast, number of electric vehicles manufactured last year exceeded 10 million for the first time and increased by 43 percent year-on-year. Electric cars currently account for one percent of the global number of vehicles. According to data from the International Energy Agency (IEA), about two-thirds of the number is purely electric vehicles, the remaining third are plug-in hybrids.

It is obvious that electromobility is an inevitable trend in passenger transport and the largest economic powers are betting on it. Data from 2021 will indicate whether Europe confirms its break to become electric mobility superpower.

Lưu Đỗ Hoàng Anh, AlphoFinancial Analyst

Licences and Authorisation:

Alpho is a brand of Gulf Brokers Ltd. a limited liability company regulated as a Securities Dealer by the Seychelles Financial Services Authority of Seychelles (“FSA”) with license number SD013 to carry out certain categories of financial investment business as permitted under the Seychelles Securities Act 2007.

Risk Warning:

With excellent results, tales of the past don’t have so much influence on the stock price of VW. On July 29, 2021, VW announced results for the first half of the year – operating result reaches a record level of 11.4 billion EUR despite pandemics. Revenue is +10% and earnings-per-share are +30% better-than-expected.[1] Despite the tales from the past, it does not seem to have much of an impact on Volkswagen’s share value in past couple of years – the price moved in range of 100-150 EUR per share.[2]

Dieselgate scandal has cost the VW Group more than 32 billion euros in fines and legal cost so far. There is still pending 4.1 billion euros of shareholders claims in relation to the crisis – but before resolvent it can pass years.[3] Currently, Porsche is facing a lawsuit in the USA. Reasons are claims related to the diesel emissions scandal connected with Volkswagen, since Porsche is VW’s largest shareholder.[4]

On July 22, 2021, shareholders in Volkswagen approved a deal to settle claims against four former executives – Volkswagen will receive 288 million euros in compensation.

In 2015, Volkswagen has admitted that they have cheated US diesel engine tests – it was the biggest business crisis in history. Two executives that were most responsible were – former VW’s CEO Martin Winterkorn and former Audi boss Rupert Stadler.

Winterkorn and Stadler – both denied being responsible for the scandal. Ex-CEO Winterkorn resigned a week after the scandal broke. Also, VW ended Stadler’s contract as Audi CEO almost three years after the scandal.[5]

Since these are the remnants of an affair more than six years old, the news has little effect on stock price movements. It only shows how much VW has moved in compliance with regulations, and greater internal control. From manipulating the software to disguise the actual amount of exhaust, to a complete turn and electrification of the vehicle.

By 2025, VW plans to have 80 new electric and plug-in hybrid models for sale. Also, the entire Group will invest more than €50 billion in battery cell technology over the next course of years. And by 2030, the Group will only have all-electric or hybrid version of vehicles.

This turn could be the basis for the continuation of the previous excellent sales figures, and the continued growth of the company's value.

As it can be seen in the VW’s Press Release, based on the business performance in the first six months of 2021, the Group lowered its forecast for deliveries to customers. Biggest reason is COVID-19 pandemics – and if it will be successfully contained, the Group will still have a bumpy road on the recovery. It will take some time for the entire economy and the supply chain to be in “normal conditions”.

In 2021, the Group expects the sales revenue to be better than in 2020, in range 6-7.5%, in other words, numbers should be better than in 2019.[6]

In comparison, first 6 months: sales revenue was 125.2 billion EUR in 2019, 96.1 billion EUR in 2020, and for 2021 it is 129.7 billion EUR. Operating profit and margin for 2019 was 8.0%, for 2020 was -0.8% and for 2021 is 8.8%. Clean net cash flow for 2019 was 6.9 billion EUR, for 2020 was -2.3 billion EUR, and for 2021 is 12.3 billion EUR.

According to CNN Business, median estimates for Volkswagen AG price in the next 12-month – possible growth of +32.87% from the closing price on August 11, 2021. [7]

Lưu Đỗ Hoàng Anh, Financial Analyst

[1] VW Press release: https://www.volkswagenag.com/en/news/2021/07/Volkswagen_Group_raises_outlook_for_2021.html

[2] Past performance is no guarantee of future results.

[3] Past performance is no guarantee of future results.

[4] Porsche lawsuit: https://www.reuters.com/legal/litigation/porsche-se-faces-us-lawsuit-over-dieselgate-scandal-2021-08-10/

[5] Dieselgate: https://www.reuters.com/business/autos-transportation/volkswagen-seek-dieselgate-damages-former-ceo-audi-boss-2021-03-26/

[6] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current economic environment, which is subject to change. Such statements are not guaranteeing of future performance. They involve risks and other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-looking statements.

As China’s anti-monopoly bureau tightened its regulations on big tech players and imposed some fines, Alibaba was hit hard with a record-high antitrust fine of 18.2 billion yuan (more than 2.8 billion USD) for supposedly abusing market dominance. One month later Alibaba Group Holdings Limited (NYSE: BABA) announced its Q1 2021 results with an increase of 64% in revenues compared to last year. The company reached annual active consumers of over 1 billion, including 891 million consumers across Chinese retail marketplace.[1] Proving thus a firm position of its business model and standing.

"Alibaba achieved a historic milestone of one billion annual active consumers globally in the fiscal year ended March 2021," commented Daniel Zhang, Chairman and Chief Executive Officer of Alibaba Group.

"We will continue to focus on customer experience and value creation through innovation, as we pursue our mission to make it easy to do business anywhere in the digital era," he added.

Only 1.8% of the Chinese were online in 2000, when Alibaba had been on the market for only 1 year. Nowadays, more than 50% of the population is online.

Until 2007, everything was unregulated – however, in that year, the Chinese government made decision that all video-sharing platforms need to be licensed. That decision was reason that led Baidu, Alibaba and Tencent to dominate the market. The sole licensing was a response to international pressure, mostly Motion Picture Association of America.

Nevertheless, Alibaba took the use of the regulation and strived to become one of the world's largest retailers and e-commerce companies.