Game-Changing Developments Are Unfolding in the Korean PeninsulaApr27

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Daily Intelligence Briefing – April 23, 2018

FEATURED TOPIC: GAME-CHANGING DEVELOPMENTS ARE UNFOLDING IN THE KOREAN PENINSULA

When North and South Korean athletes marched together under one flag during the opening ceremony of the 2018 Winter Olympics, that rare gesture of unity set the tone for what could be a historic year for the Korean peninsula. A series of diplomatic moves since then have cleared a path for negotiations that could finally wrap up the 7-decades-old Korean war and normalize relations between Pyongyang, Seoul and Washington D.C.

This is a remarkable reversal from last year when skyrocketing tensions led to name-calling and threats of nuclear war. Now, all of that seems like yesteryear. Last week, the first telephone hotline was set up between North Koreaʼs Kim Jong Un and South Koreaʼs Moon Jae-in. The two leaders plan to have their first phone conversation before meeting face-to-face at a leadership summit on April 29, where they will discuss de-nuclearization and a peace treaty to officially end their state of war. If all goes well, that will be followed by a separate summit between North Koreaʼs leader and US President, Donald Trump, sometime in May or June.

The dismantling of North Koreaʼs nuclear arsenal – if that is indeed what Kim Jong Un means by de-nuclearization – would be in return for establishing diplomatic ties with the U.S., securing aid to help rebuild its economy, and getting America to approve the Northʼs peace treaty with South Korea.

President Kimʼs sudden about face has many skeptics wondering whether he has more nefarious objectives in entering the negotiations. Some analysts note that Pyongyang has always shown tactical flexibility to avoid serious confrontations and to get cash and technology when needed. It is therefore possible that North Korea needs additional resources for its weapons development program, and a compromise today will provide access to materials necessary for those next steps.

Others argue that North Korea has been reeling from the economic squeeze of sanctions, including by ally China, and may be eager to end that pain. Also, Kim Jong Un has placed greater emphasis on economic development alongside his nuclear goals since taking power in 2011. That shift could make any offers of financial assistance from the U.S. and its allies more appealing in negotiations.

In the meantime, President Trump has expressed support for peace talks between North and South Korea. However, he has made it clear that his ultimate goal is to force North Korea to relinquish its nuclear program, and says he will walk away from discussions if he gets the sense that diplomatic negotiations wonʼt lead to that end. He has further stated that the United Nations would keep sanctions on until North Korea gives up its nuclear weapons.

Optimism rose last week on unconfirmed reports that the North Korean leader has removed a key obstacle to negotiations with Washington by no longer insisting that American troops be removed from South Korea as a condition for denuclearizing his country. Then on Friday, came a surprise announcement from President Kim that North Korea had achieved its goal of developing nuclear weapons, would be suspending further nuclear or intercontinental ballistic missile tests, and would dismantle the nuclear test site in the northern area of the country.

We are still in the very early days of negotiations, and given several decades of failed agreements, there is no reason to believe this current attempt wonʼt fall apart. However, if they do succeed, de-nuclearization and a peace treaty would be a game-changer for both the North and South Korean economies. It could even pave the path for eventual reunification, although that’s still a farfetched scenario at this time. IF a reunification was in the cards, South koreaʼs infrastructure, telecom, steelmaking and food companies could be big winners, while defense stocks would be losers

Already, South Korean stocks have been outperforming U.S. equities this past year. Per Nomura, the South Korea nation, with its 50 million people, is undergoing structural changes not only within its giant corporate groups, known as chaebol, but also at the societal level. The KOSPI, which has historically been cheaper than other markets due to corporate governance issues, is set to benefit from this. Currently, the Kospi trades at about 1.1 times book value, compared with 3.3 times for the S&P 500 Index.

Investors can gain exposure to South Korean equities via the South Korea ETF (EWY).

HERE IN THE MEANTIME are some articles relating to this featured topic (the stories are summarized in the POLITICS & POLICY section of today’s report):

• Koreas – North Korea: Historic phone line opened with South Korea
• Koreas – Seoul Sees Path for Peace Deal to Formally End Korean War
• Koreas – South Korean Leader Says the North Dropped Demand to Remove U.S. Troops
• Koreas – South Korea’s antitrust chief says expects change in Samsung governance ‘in near future’
• Koreas – Noodles pushing rice off Korean dining table
• Koreas – These Are the Stocks to Buy If the Two Koreas Reunify, Says Nomura

CHART: South Korea ETF (EWY) vs S&P 500 ETF (SPY)

OTHER DISRUPTIVE CHANGE:

• Markets:
  • Cryptocurrencies – IOTA-Fueled Electric Vehicle Charging Station Unveiled in the Netherlands
• Economics and Trade:
  • Tariffs – Proposed U.S. Tariffs on China Risk Penalizing Manufacturers Unevenly
  • World Economy – The world readies itself for the Donald Trump boom
• Finance:
  • Banks – GOP tax law saved big banks $3.6 billion
  • VC – This year’s trends to watch and startups that could help shape the future of legal cannabis
• Labor, Education & Demographics: 
  • Demographics – Europeʼs Depopulation Time Bomb Is Ticking in the Baltics
• Services:
  • Advertising – How Europe’s ‘breakthrough’ privacy law takes on Facebook and Google
  • Tobacco – Philip Morris Plunges the Most in a Decade on Slump in Cigarettes
  • Cannabis – Will Marijuana Industry Overtake Beer As Legalization Spurs Innovation?
• Manufacturing and Logistics:
  • Digital Fabrication – Soon Youʼll Be Able to Make Anything. Itʼll Change Politics Forever
  • Firearms – U.S. Online Gun Market Takes a Hit From Wisconsin Court Ruling
  • Defense – Quantum Radar Could Make Stealth Technology Obsolete
• Technology: 
  • 5G – AT&T lays 5G groundwork in 117 additional U.S. markets
  • Semiconductors – Chips down: China aims to boost semiconductors as trade war looms
  • Smartphones – Apple Jitters Mount on Concerns of Waning Smartphone Demand
• Transportation:
  • Drones – US to drop curbs on drone tech to boost arms sales
  • EVs – Ride the Lightning: Electric Car Charging Technology Is About to Surge Past Tesla’s Superchargers
• Commodities:
  • Aluminum – Wanted: New Home for a Lot of Russian Aluminum
  • Oil – Disaster Looms Over Libyan Oil
  • Oil – Asian oil demand to hit record, but industry can’t take eyes off Middle East
  • Oil – Bullish Oil Signals Proliferate as OPEC Cuts Get Even Deeper
  • LNG – Why European Gas Storage May Struggle to Refill this Summer
• Biotech:
  • CRISPR – Gene therapy could free some people from a lifetime of blood transfusions
  • Pharma – US opioid prescriptions in record decline
• Endnote: 
  • Trade – US Goods Trade Deficit with China and Rest of the World

JOE MAC’S MARKET VIEWPOINT

• Joe Mac’s Market Viewpoint: A Review of MRP Themes
• Joe Mac’s Market Viewpoint: Beyond the HOUSING HEADWINDS
• Joe Macʼs Market Viewpoint: The Coming Value Rotation
• Joe Macʼs Market Viewpoint: Beyond the BOND BUBBLE
• Joe Mac’s Market Viewpoint: Contrarian Crude Call

CURRENT MRP THEMES

About the DIBs: MRP focuses on identifying transformational 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 disruptive 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. 

Oil Prices Fall After Trump Tweet

Oil prices retreated from 2014-highs on Friday after President Trump said in a tweet that ‘Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!?.’ The tweet was sent amid an OPEC and non-OPEC oil producers meeting in Jeddah and after Saudi Arabiaʼs Energy Minister said the world economy could handle higher oil prices. The US crude was down 1% to $67.51 a barrel and the Brent crude fell 1% to $73 a barrel around 10:05 AM NY time. TE

Pound Dips After BoE Carney Comments

The British pound extended losses Friday morning and was trading at $1.4058 around 9:45 London time after Bank of England Governor Mark Carney said on Thursday that he expects rates to rise over the next few years but did not want to focus on “precise timing”. Carney also said there “will be some differences of view” at May’s policy meeting, surprising investors who were almost certain of a 25bps hike next month. TE

Eurozone Consumer Morale Unexpectedly Rises in April

The Eurozone’s consumer confidence indicator rose by 0.3 points from the previous month to 0.4 in April 2018, easily beating market expectations of -0.2, a flash estimate showed. In the European Union as a whole, consumer sentiment decreased by 0.5 points to -0.8. TE

Moody’s Upgrades Czech Republic’s Credit Outlook to Positive

Moody’s Ratings Service revised the Czech Republic’s sovereign credit rating outlook to positive from stable and affirmed the country’s debt grade at A1, citing as key driver the continuing improvement in fiscal metrics supported by strong growth momentum. Standard & Poor’s credit rating for Czech Republic stands at AA- with stable outlook. Fitch’s credit rating for Czech Republic was last reported at A+ with positive outlook.  TE

Commodities: Baltic Dry +6.66%, Cocoa -6.00%

Top commodity gainers are Baltic Dry (6.66%), Cotton (2.22%) and Natural gas (1.39%). Biggest losers are Cocoa (-6.00%), Wheat (-1.52%) and Steel (-1.27%). TE

Cryptocurrencies – IOTA-Fueled Electric Vehicle Charging Station Unveiled in the Netherlands

An electric vehicle charging station in the Netherlands is now using IOTAʼs Tangle technology for feeless machine-to-machine communication. ElaadNL, a solar- and wind power- fueled smart-charging initiative by the Dutch grid operators, has teamed up with IOTA for the maiden DLT-fueled charging station for electric vehicles.

The IOTA charger is built on IOTAʼs open-source Tangle technology, an internal protocol that does without blocks and miners and delivers “secure data transfers” as well as zero-fee micropayments. IOTAʼs Tangle technology is also powering Taipeiʼs smart-city initiative

The IOTA digital currency, which is currently ranked No. 9 among the leading digital coins based on market cap, is trading higher alongside its peers after gaining 12 percent on the day. CCN

Tariffs – Proposed U.S. Tariffs on China Risk Penalizing Manufacturers Unevenly

China is a significant source of materials for only a small fraction of products on President Donald Trumpʼs proposed list of tariffs, but they could disproportionately hit some U.S. manufacturers that depend on Chinese imports by driving up costs and forcing them to raise prices.

Of at least 345 product categories entirely covered by the proposed tariffs, just 5% of the total imported value last year came from China. For more than 90 of those, including pacemakers and combine harvester-threshers, China accounted for less than 0.1% of the value. Meanwhile, 38 categories of products had a significant amount of imports —of more than 30%—from China.

As a result, manufacturers that import those products from China rather than elsewhere are likely to bear the brunt of the tariffs. If they canʼt find alternative suppliers some companies may have to raise prices at a time when raw-material and labor costs are already rising.

Some proposed tariffs however, such as those on household dishwashers, could benefit U.S. manufacturers like Whirlpool Corp., the Michigan-based appliance maker that makes dishwashers sold in the U.S. at its factory in Findlay, Ohio.  WSJ 

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World Economy – The world readies itself for the Donald Trump boom 

The IMF predicts global growth of 3.9 per cent in 2018 and 2019, an upgrade of 0.2 percentage points since the last round of forecasts and the best outcome since 2011. Half of the upgrade is due to the global effects of Mr. Trumpʼs stimulus, which will generate strong growth at home, but has large global effects because the US is already so close to full employment. His tax cuts and spending plans mean the US is on course for budget deficits of around 5 per cent of gross domestic product. 

The stimulus may also force the US Federal Reserve to raise rates, in order to prevent the economy from overheating, which will mean higher interest payments on debt to foreigners. As a result, the IMF forecasts the US current account deficit will widen by a full percentage point between 2017 and 2019, to 3.4 per cent of GDP.

Mr Trumpʼs protectionist instincts are often described as a threat to global prosperity. For the next two years, however, his stimulus means we will be living with a Trump boom. Let us hope the contradictions inherent in his policy do not end with a Trump crash. FT

Koreas – North Korea: Historic phone line opened with South Korea

North Korea and South Korea opened a direct phone line between their two respective leaders on Friday in preparation for a summit between the president of the South, Moon Jae In, and North Korean ruler Kim Jong Un next week.

In the past, the two sides have communicated through a phone line at the Panmunjom border village, but the line has often been shut down. The use of phone lines was championed by late South Korean President Kim Dae-jung as part of his Sunshine policy of re-engagement with the North. The new hotline reaffirms the Northʼs commitment to upcoming peace talks.

The focus of the meeting will largely be on denuclearization as well as the possibility of replacing the existing ceasefire arrangement with a lasting peace arrangement. The pair will discuss the possibility of both sides “withdrawing heavy weapons and guard posts” from the demilitarized zone. What is not on the agenda, to the consternation of many in the South, is Pyongyang’s dreadful record on human rights. DW

Koreas – Seoul Sees Path for Peace Deal to Formally End Korean War

Seoul could push for a more-permanent peace agreement on the Korean Peninsula, potentially involving the U.S. and China, to replace the armistice that ended the Korean War. The armistice wasnʼt a peace treaty, and the unstable nature of the agreement has resulted in an uneasy truce along the demilitarized zone for more than 70 years, with occasional skirmishes.

Such a move could pave the way for a deal to end the standoff over North Koreaʼs nuclear weapons. South Korean officials have said denuclearization will be a priority at the talks, but have disclosed few details on what Mr. Moon will offer, or suggest, to help persuade Mr. Kim to give up his weapons.

Any conclusive peace deal involving the two Koreas would need contributions and backing from others. That is a likely reference to China and the U.S., the other main combatants in the 1950-53 conflict. A peace deal involving the four parties wouldnʼt be that hard to arrange; Pyongyang and the U.S. have previously agreed in principle to pursue one. WSJ

Koreas – South Korean Leader Says the North Dropped Demand to Remove U.S. Troops

South Korean President Moon Jae-in said Thursday that North Korea had dropped its longtime insistence that the U.S. remove its 28,500 troops from the Korean Peninsula ahead of a planned summit, saying that it only sought a security guarantee and an end to the U.S.ʼs “hostile policy,” remarks that would potentially remove a longtime obstacle to talks between Washington and Pyongyang. But Korea experts doubted there was any substantive policy change from Pyongyang; the North Korean definition of ʽhostile policyʼ is an ultimately malleable concept.

Soon after North Korean leader Kim Jong Un took the reins from his father in late 2011, North Koreaʼs state media published a long statement outlining the components of what it regarded as the end of the U.S.ʼs “hostile policy” against it, including comprehensive sanctions relief, a peace treaty that would end annual joint U.S.-South Korean military exercises, an end to the U.S. military presence on the Korean Peninsula, diplomatic recognition and energy assistance.

Seoul is pushing for a more-permanent peace agreement to replace the armistice that ended hostilities at the end of the Korean War in 1953, but that term, too, is a complex one. On Wednesday, a spokesman for South Koreaʼs presidential office attempted to parse the differences between a “peace regime,” a “peace treaty” and a “peace agreement.” These are things that the North Koreans can and do split hairs on. WSJ

Koreas – South Korea’s antitrust chief says expects change in Samsung governance ‘in near future’

South Koreaʼs antitrust chief on Friday said he expects Samsung Group to unravel its governance structure in the near future, as the government and investors call for reform of the countryʼs powerful family-controlled conglomerates, or chaebols. Chaebol families have come under increased scrutiny since the arrest last year of Samsung Group heir Jay Y. Lee, who denies wrongdoing, on charges of bribery and embezzlement.

Samsungʼs most crucial task is to resolve ties between Samsung Life and Samsung Electronics. Samsung Life Insurance is at the heart of a cross-shareholding structure in which it owns about 8 percent of Samsung Electronics.

Last month, South Koreaʼs second-biggest chaebol, Hyundai Motor Group, announced a plan to streamline its ownership structure in response to calls for chaebol reform.

Lee, vice chairman of Samsung Electronics, was found guilty but freed in February after an appeals court suspended his prison sentence. The case is currently assigned to the Supreme Court after further appeal. Change in Samsungʼs corporate governance is expected to begin when Leeʼs trials end. R

Koreas – Noodles pushing rice off Korean dining table

Over the past four decades, there has been an outstanding change in Koreans’ dietary patterns ― noodles have been gradually replacing rice. Koreans’ per capita rice consumption in 2016 was 61.9 kg, less than 50 percent of the 1980 level. Korea’s per capita instant noodle consumption is the highest worldwide, and consumption of other noodles, such as noodle soups, is also on the rise. Korea imports 98 percent of its wheat flour, the main ingredient of noodles, amid the overproduction of homegrown rice. 

The main consumers of noodles are those who were born in the 1970s. They spent their childhood years in the 1970s when the nation saw its first noodle boom, so were more accustomed to noodles than rice. Their dietary pattern has not changed as they grew older. 

A low-carbohydrate campaign in the 1960s and 1970s also played a part. National rice production hit a low, leading to a scheme requiring retailers to blend 20 percent of other grains in each bag of rice. Restaurants also had to follow the 20 percent rule when serving rice to their clients. In schools, students had to show what’s inside their lunch box to make sure they followed the rule. KTimes

Koreas – These Are the Stocks to Buy If the Two Koreas Reunify, Says Nomura

Few people are expecting North Korea and South Korea to become one anytime soon. However, if reunification is on the cards, Jim McCafferty, Nomuraʼs head of Asia ex-Japan equity research, says itʼs [time] to buy infrastructure and other stocks. Particularly:

·         Japanʼs Komatsu Ltd. and South Koreaʼs Doosan Infracore Co. because the makers of construction machinery will probably benefit from projects to extract minerals in the North

·         Telecommunications providers such as SK Telecom Co., LG Uplus Corp. and NTT Docomo Inc., which could purchase spectrum from North Korea

·         Steelmakers including Posco and food companies such as Ottogi Corp. and NongShim Co.

·         But sell defense stocks, including Korea Aerospace Industries Ltd. and Hanwha Techwin Co.

McCafferty says heʼs bullish on South Korean equities regardless of whether the two countries reunify, and expects the Kospi index will reach 3,000 by year-end — more than 20% higher than current levels. The nation is undergoing change not only within its giant corporate groups, known as chaebol, but also as the society embraces campaigns such as the “Me Too” movement. The stock market, which has historically been cheaper than other markets due to corporate governance issues, is set to benefit, he said. B 

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Banks – GOP tax law saved big banks $3.6 billion

Six big banks saved at least $3.59 billion in taxes in the first quarter of 2018 following the enactment of the GOP’s tax-cut law in December. The banks estimated that for all of 2018, they will have tax rates of between 20 percent and 22 percent. Analysis focused on Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley and Bank of America.

Democrats and Republicans have been engaging in a messaging battle over the tax law in advance of November’s midterm elections. Republicans have focused on the increases in people’s paychecks and the businesses that have announced bonuses, wage increases and domestic investment in recent months. Democrats, on the other hand, have been highlighting businesses’ large tax savings and their announcements of stock buybacks.

Bank executives have said most of their savings will go to buybacks and increased dividends, but that some will go to increased wages and investments. Hill

VC – This year’s trends to watch and startups that could help shape the future of legal cannabis

The cannabis industry is ripe for innovation, and startups are working on technologies that could transform the future of the legal cannabis market. Even amidst the uncertainties of federal de-regulation, states are slowly starting to legalize both medical and recreational uses of marijuana. And with this big shift, more and more startups in the space are creating new tools — from compliance platforms to payment solutions — for dispensaries, retailers, and consumers.

CB Insights has identified the most relevant marijuana trends in 2018, and profiled some most promising private companies capitalizing on those trends. The selected startups are early- to mid-stage high-momentum companies pioneering technology with the potential to transform the legal cannabis industry. Hereʼs that report, which digs into the 16 startups across 6 categories, from healthcare to agriculture. CBI

Demographics – Europeʼs Depopulation Time Bomb Is Ticking in the Baltics

Nine of the worldʼs countries most at risk of losing citizens over the next few decades are former East bloc nations. Several factors are contributing to the depopulation of Eastern Europe, and Latvia has all of them: low income, compared with more developed EU nations; insufficient growth; and strong anti-immigrant sentiment.

Latvia, with a current population of 1.96 million, has lost about 25 percent of its residents since throwing off Soviet control in 1991. The UN predicts that by 2050, it will have lost an additional 22 percent of its current population—second only to Bulgaria—and by 2100, 41 percent. In Estonia, with a population of 1.32 million, the UN foresees a 13 percent decline by 2050, growing to 32 percent by 2100.

To stop emigration, you need economic growth, but to achieve economic growth, you need to explain to foreign investors what youʼre going to do about declining population. The Irish “economic miracle” happened because of highly attractive tax incentives that brought in future digital economy giants.

The birthplace of Skype, Estonia has been actively touting itself as a digital paradise, with a government seeking to attract foreign investors with offers of residence permits and no tax on retained or reinvested profit. A flagship investor is ABB Ltd., a Swiss company specializing in robotics. Other major investors include banks such as Swedbank, SEB and Nordea Bank. Telefonaktiebolaget L. M. Ericsson, the Swedish telecom giant which produces mobile base stations at its plant in Tallinn, employs 1,200 people. B

Advertising – How Europe’s ‘breakthrough’ privacy law takes on Facebook and Google

Europeʼs looming General Data Protection Regulation will force companies including Facebook to make sweeping changes to the way they collect data and consent from users – with huge fines for those who donʼt comply.

GDPR requires companies to protect the personal data and privacy of residents of EU countries and restricts the way businesses collect, store and export peopleʼs personal data. Thatʼs any information related to a person that can be used to identify them, including their name, photo, email address, IP address, bank details, posts on a social networking site, medical information, biometric data and sexual orientation.

Companies with the most work to do are big data-hungry technology platforms like Amazon, Google and Facebook, and advertising technology companies such as Criteo, whose technology powers those ads featuring products youʼve browsed online that follow you around the internet.

Complying with GDPR may be a little onerous for companies that donʼt have the engineering resources of Facebook or Google. About 68% of US companies expect to spend between $1m and $10m to comply with GDPR. Guardian

Tobacco – Philip Morris Plunges the Most in a Decade on Slump in Cigarettes

Philip Morris stock plunged 17% in midday trading, as cigarette volumes dropped more than expected and the companyʼs IQOS product experienced slower growth. The lackluster results raised bigger fears across the sector and hit other tobacco stocks, with British American Tobacco and Imperial Brands closing down 5.4% and 2.9%. Altria Group was off 7.7%.

Cigarette shipment volume declined 5.3% during the first quarter, hit by big drops in Japan, Russia and Saudi Arabia. The drop was worse than expected despite an easy comparison with the year-earlier quarter, when volumes dropped 11.5%. IQOS, a hand-held device that heats but doesnʼt burn tobacco, added just 3 percentage points to cigarette volumes, almost half the level added in the previous quarter. Philip Morris has touted the smokeless tobacco product as its main investment bet.

Philip Morris and its rivals have spent billions of dollars in recent years to research and market new products they believe will help lure existing smokers from conventional cigarettes, whose sales are in decline globally. While tobacco companies have so far been able to offset declining volumes with rising prices, that strategy is seen as having limits, and companies are scaling back investments in traditional tobacco operations. WSJ

Cannabis – Will Marijuana Industry Overtake Beer As Legalization Spurs Innovation?

Big money is pouring into the legal cannabis market. And as the marijuana industry evolves into everyday consumerism, struggling beer and tobacco companies might find an avenue for new business

The trend has spurred Constellation Brands, the parent of Corona beer, to place a bigger bet on cannabis drinks. The creator of Blue Moon wants to make THC beer. Former beverage execs have switched to the marijuana business. As for big tobacco companies, vaping devices alone could hand them a huge chunk of the pot market.

Vaping is one of the fastest-growing segments in both nicotine and cannabis. Big tobacco companies could nearly double their underlying growth via the cannabis market and grab around a fifth of the overall share of the marijuana industry by 2036 in a fully-legal U.S.

U.S. marijuana business could reach an estimated $75 billion by 2030 if fully legalized, indicating explosive growth. That projection also compares with some estimates for current annual cigarette sales of $77 billion and beer sales of $110 billion, both of which are on the downtrend. Meanwhile Canada has been grooming itself to be a global leader for the cannabis industry. Toronto-based Cronos Group has listed on the Nasdaq. Others, like Aurora Cannabis and Canopy Growth Corp., plan to follow. IBD

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