Equity markets outside of US tech are struggling to maintain any momentum as the twin policies of  economic self harm from stop-start lockdown and Election fueled Cold War rhetoric against China combine to further undermine any sort of business and investment confidence. Hong Kong, where the market fell sharply at the end of last week, is a classic case in point. The trigger for the selling was the escalation of tension between the US and China, with the closure of the Chinese consulate in Houston being countered by the closure of the US consulate in Chengdu. As noted last week, a little reported fact behind the dispute is that the US wanted to send its officials back to Wuhan without any of the testing and quarantine protocols required for Covid, with the Chinese pointing out that diplomatic immunity did not equal viral immunity. The obvious next step as far as we can see would be a closure of the Consulate in Hong Kong, not least because of the role the Chinese believe they had in last year’s protests.

Meanwhile on the basis of a cluster of new cases, (but still only 18 deaths in total this year), HK Chief Executive Carrie Lam has effectively locked down the City once more. All schools are closed (again) and so are all the beaches (and this is now being rigorously enforced), as are restaurants, gyms etc and most people are working from home again – which in a Hong Kong summer is rarely pleasant  at the best of times. If this wasn’t a big enough over-reaction, as of today, the local government have announced mask wearing is to be mandatory outside – even during exercise, at 34 degrees! It’s almost as if there is a plan to get all the ex-pats to leave the country. Certainly, if schools don’t re-open in September there are a lot of ex pat families likely to stay ‘home’ where many have gone for summer vacation, while the viability of having a regional posting in Hong Kong but being effectively unable to travel in the region due to the two week quarantine is also going to lead to a lot of western companies questioning the point of the ex pat – especially in finance. There are an estimated 90,000 expats in Hong Kong, 25,000 of whom are American, the highest, followed by the UK at 21,000.

More likely the reality is that. as seems to be happening everywhere, the political need to ‘save face’ is paramount. In Hong Kong, the whole saga is sadly beginning to look like a repeat of the Mao era regional governors who reported record grain harvests to the central committee and were thus required to pass on the ‘surplus’ to central authorities even as the locals starved. Hong Kong is being squeezed between a local government obsessed with the virus and the US government using it as a pawn in its power games with China.

Meanwhile, not to be outdone in applying random authoritarianism, the UK government has mandated wearing of face masks in shops from this week – their behavioral ‘experts’ believing that this will increase confidence and get more people shopping. At the risk of falling for anecdote fallacy, while simultaneously accusing the UK government of doing so itself, we can state that here is France, where President Macron has already put such an order in place, the streets are crowded but the shops are empty.  Essential shopping – as in go into shop, pick up item required, pay and leave – is just about bearable, but the notion of shopping as a pastime or leisure activity is vastly different. President Macron, who appears actually to be setting the agenda for the UK in terms of Covid policy – albeit with a two or three week lag – has the ‘advantage’ that online shopping and super-market delivery is far less widespread in France, but by first refusing to impose a policy (for good reasons) and then doing a U Turn and doing so seemingly because France just did (see lockdown for example), the UK government has just dealt another unnecessary blow to the UK high street. No wonder that UK retail stocks are languishing at 20 year lows, while the associated property stocks are in a similar position. In addition, the sudden U turn on air-bridges to Spain by the UK and also increasing commentary from other European countries has thrown the tourism and leisure sector back into massive uncertainty.

Meanwhile, the fact that much of the leisure and entertainment part of the high street has been kept on life support by Private Equity over the last few years is also a concern for landlords and banks, since many operators were planning to leverage up and sell on. Having done the first (and extracted large amounts of rent for themselves) they find the market for selling on has disappeared. Increased default is on the cards, for landlords, creditors and other equity holders. As noted before, the chase for ‘alternative’ investments means that institutional investors like pension funds and insurance companies may find themselves exposed in multiple ways. In a search for ‘uncorrelated assets’, as in uncorrelated with liquid equity markets, they may find that they have painted themselves into a corner, where all their alternative assets are now correlated with each other and are all exposed to heavily indebted Covid Casualties. And to make things even better, they are, almost by definition, almost totally illiquid. Never fear, the advisers and fund managers have a new exciting ESG product to sell you.

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