Raphael Stevens

IT IS EASY to forget that the world’s second-biggest economy is still an emerging market. China’s global clout, its technological prowess in certain fields, and even its low bond yields all distinguish it from the typical member of its asset class. But in at least one respect China resembles a classic emerging market: it retains a palpable fear of floating its currency. Instead China keeps a close eye on the yuan’s value against the dollar and a basket of its trading partners’ currencies, limiting any sharp movements.For most of the past year, it worried that the yuan would float too high. China’s largely successful efforts to stamp out the early variants of covid-19 kept its factories open and its borders closed. That allowed its exports to boom, putting upward pressure on the yuan, even as outbound tourism and other services imports suffered, removing a source of downward pressure. The yuan rose sharply against the basket of trading partners’ currencies and gently against the dollar, which was itself strong.Now China’s fight against the pandemic is instead contributing to the currency’s sudden weakness. Lockdowns stringent enough to hamper manufacturing have been imposed on Shanghai and other cities accounting for over 9% of GDP, according to Gavekal Dragonomics, a consultancy. China’s economic figures for April will “certainly be disastrous”, it says. The war in Ukraine has contributed to outflows from China’s bond and equity markets, as foreigners reassess the risks of investing in countries at geopolitical loggerheads with the West. And as America has lost its fear of the virus, its economy has overheated, forcing the Federal Reserve to raise interest rates. In April the nominal yield on ten-year Treasuries briefly exceeded that on Chinese bonds for the first time since 2010. (Real yields remain much higher in China, where consumer-price inflation is only 1.5%, compared with 8.5% in America’s larger, more “mature” economy.)A weaker yuan is both a reflection of these challenges and one way to cope with them. It will in particular help to shore up China’s exports. But the central bank is not prepared to let the currency be dominated by market forces. It bears the scars of past falls in the yuan, which took on a momentum of their own. On April 25th it said it would cut the amount of reserves banks are required to hold from 9% of their foreign-exchange deposits to 8%. That will release some dollars to the market, alleviating pressure on the yuan. The move also signals the central bank’s displeasure at the speed of its currency’s descent.China’s currency worries may deter the central bank from cutting interest rates to revive growth. That will leave its economy more dependent than ever on fiscal stimulus. At a meeting of the powerful Central Committee for Financial and Economic Affairs on April 26th, Xi Jinping, China’s president, called for more investment in infrastructure, from rural roads and urban drains to smart electricity grids and artificial-intelligence platforms. Citigroup, a bank, forecasts that infrastructure spending could grow by 8% this year. But according to Natixis, another bank, China will not meet its (increasingly forlorn) growth target of around 5.5% unless infrastructure investment grows by almost 18%. Even a conventional emerging market with vast infrastructure needs would struggle to boost spending by that much. China’s fear of floating has inhibited its monetary response to its economic woes. And that has raised fears of its floundering. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

IN 1988 STEVE GUTTENBERG, a comic actor, appeared on a British talk show. At one point he was asked why he had not appeared in “Police Academy 5”, having starred in the earlier films. He replied that, in his view, all the important philosophical questions had been addressed in the first four movies.This brings us to the more serious business of investing, and a sequel of a very different kind. Ten years ago Antti Ilmanen, a finance whizz, published “Expected Returns”, a brilliant distillation of investment theory, practice and wisdom. His latest book, “Investing Amid Low Expected Returns”, is an update, taking in a decade’s worth of additional research and data. Mr Ilmanen has read all the books and papers, sorting the good stuff from the junk. He has a gift for explaining clearly and concisely the lessons of this research for investors. The new book is as invaluable a resource as the old one. If it has a fault, it is that it does not quite address all the important philosophical questions. A sequel may be necessary.Start, though, with a recap of the expected-returns framework. There are two sources of return on an investment: income and capital gain. The income on, for instance, a government bond is the interest (or “coupon”) paid once or twice a year. Bond prices and yields move inversely. So when interest rates fall, as they did for much of the past four decades, bond investors enjoy a capital gain. In essence a capital gain of this kind brings forward future returns. You get the income now you were going to get later. But as yields fall ever lower the scope for further capital gains becomes more limited. So low yields imply low expected returns. This bond-like logic holds for other assets—equities, property, private equity and so on. Dividend and rental yields have fallen in response to the secular fall in interest rates. Owners of all kinds of assets have experienced windfall gains. But today’s low yields imply low expected returns in the future.What now? As Mr Ilmanen sees it, low expected returns can materialise through either “slow” or “fast” pain. In the slow-pain scenario, assets remain expensive and investors receive desultory bond coupons, equity dividends and rental receipts for years on end. In the fast-pain scenario yields revert to their higher historical averages. This implies a spell of brutal capital losses followed by fairer returns thereafter. The choice is between well-heeled stagnation and a crash.Mr Ilmanen is too much of an epistemological sceptic to put all his chips on one scenario. He is also too careful an analyst to miss that low inflation made the high-asset-price, low-yield 2010s what they were. Many of the factors that kept a lid on inflation in that decade—globalisation, efficient supply-chain management, tight fiscal policy, an expanding global workforce—are now attenuating or unwinding. Mr Ilmanen’s hunch is that the 2020s will see something of a reversal of the investment trends of the preceding decade. But he generally eschews investing on hunches.Faced with lower expected returns, investors have three courses of action: they can take more risk to reach for higher returns; they can save more; or they can accept reality and play the hand they have been dealt as well as they can. The first approach may increase returns but also makes them more uncertain. Saving more means sacrificing today for the sake of tomorrow, a highly personal choice. Understandably, Mr Ilmanen’s focus is on the third approach. He sets out a chapter-by-chapter analysis of various investment assets and styles. He advises how to put them together in a truly diversified portfolio. Along the way, he explains why market timing is a snare (you end up taking too little risk); what the true appeal of private equity is (not superior returns); and why portfolio insurance will not save you (it is too expensive in the long run).There are shortcomings. A quarter of the 500+ references are from authors affiliated with AQR Capital Management, Mr Ilmanen’s employer. This weighting gives the book a less independent air than “Expected Returns”. Readers would have benefited greatly from a chapter on the implications of low expected returns for different sorts of savers. The fast-pain scenario, for instance, is surely preferable for young savers, to whom the book is dedicated. Perhaps this and other gaps will be filled in “Expected Returns III”. Even Mr Guttenberg has been teasing fans with the prospect of “Police Academy 8”. The big philosophical questions are never truly settled.Read more from Buttonwood, our columnist on financial markets:A requiem for negative government-bond yields (Apr 23rd)The complicated politics of crypto and web3 (Apr 16th)Bonds signal recession. Stocks have been buoyant. What gives? (Apr 9th)For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

Woman holds smartphone with Meta logo in front of a displayed Facebook’s new rebrand logo Meta in this illustration picture taken October 28, 2021.
Dado Ruvic | Reuters

Check out the companies making headlines in Thursday premarket trading.
Meta — Shares of the Facebook parent soared more than 16% in premarket trading after the tech company reported better-than-expected quarterly earnings. Daily active users, which declined in the fourth quarter for the first time, bounced back a bit and topped analysts’ expectations, according to StreetAccount. The rally came despite a revenue miss. Shares were down 48% on the year heading into the results.

Teladoc — Teladoc’s stock price cratered 43% after the telehealth company reported an earnings miss, as well as disappointing revenue guidance. Teladoc reported a loss of $41.58 per share and generated revenues of $565.4 million. Analysts surveyed by FactSet were expecting a loss of 60 cents per share, and revenues of $568.7 million.
McDonald’s — Shares of the restaurant chain gained 2% in premarket trading after first quarter revenue came in higher than expected. McDonald’s reported first quarter revenue of $5.67 billion versus the $5.59 billion expected by analysts, according to Refinitiv. The company saw same store sales growth of 3.5% in the U.S. and even higher in international markets.
Southwest Airlines — The airline stock rose more than 3% in premarket trading after the company delivered an optimistic outlook. Southwest said it expected its second quarter revenue to be up 8% to 12% from the same period in 2019, prior to the pandemic.  For the first quarter, the company reported a loss of 32 cents per share, slightly wider than the 30 cents expected by analysts, according to Refinitiv. First-quarter revenues came in slightly ahead of expectations.
PayPal — The payment’s company saw shares rise 3.4% in early trading after it beat revenue estimates for the first quarter and posted a slight increase in payments volume. The stock price got a lift despite issuing weak guidance for the second quarter and full year.
Eli Lilly — The drug maker’s shares gained 3.4% in premarket trading after the company reported results from a clinical trial showing its obesity drug tirzepatide helped patients lose up to 22.5% of their weight. Eli Lilly also reported better-than-expected earnings and revenue for the first quarter and boosted its full-year revenue guidance.

Pinterest — Shares for the image sharing company surged more than 8% on the back of better-than-expected earnings Wednesday. Pinterest reported adjusted earnings of 10 cents per share and revenues of $575 million. In comparison, analysts polled by Refinitiv expected earnings of 4 cents per share on revenues of $573 million.
Caterpillar — Shares of the global construction machine maker slid more than 1% despite Caterpillar beating top- and bottom-line estimates during the first quarter. The company earned $2.88 per share excluding items on $13.59 billion in revenue. Analysts were expecting the company to earn $2.60 per share on $13.4 billion in sales, according to estimates compiled by Refinitiv.
Qualcomm — Shares rallied roughly 7% premarket after a better-than-expected quarterly report. Qualcomm posted adjust earnings per share of $3.21 on revenue of $11.16 billion. Analysts were expected a profit of $2.95 per share on revenue of $10.63 billion, according to StreetAccount.
ServiceNow — ServiceNow shares jumped more than 8% following the company’s first-quarter earnings report. The platform-as-a-service provider earned $1.73 per share on an adjusted basis and posted $1.72 billion in revenue. Wall Street was expecting $1.70 per share and $1.70 billion in revenue, according to data from StreetAccount.
— CNBC’s Yun Li, Tanaya Macheel, Hannah Miao, Jesse Pound and Pippa Stevens contributed reporting.

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Central African Republic lawmakers voted unanimously to pass a bill legalizing crypto.
Bitcoin will be considered legal tender alongside the regional Central African CFA franc.
The CAR is the second nation in the world to make bitcoin legal tender. El Salvador did so last year.

Bitcoin is a volatile asset, and has been known to swing more than 10% higher or lower in a single day.
Jakub Porzycki | Nurphoto | Getty Images

The Central African Republic has become the second country in the world to adopt bitcoin as official currency, after El Salvador took the same step last year.
Lawmakers in the CAR’s parliament voted unanimously to pass a bill legalizing bitcoin and other cryptocurrencies, according to a statement from the presidency.

Bitcoin will be considered legal tender alongside the regional Central African CFA franc.
Obed Namsio, chief of staff to President Faustin-Archange Touadera, called the move “a decisive step toward opening up new opportunities for our country,” according to Reuters.

The CAR is rich in diamonds, gold and other valuable minerals, but ranks as one of the world’s poorest and least-developed countries.
Roughly 71% of CAR’s 5.4 million inhabitants were living below the international poverty line in 2020, according to the World Bank. And just 11% of the CAR’s population have access to the internet.
The country, which is landlocked in the heart of Africa, has been gripped by political instability and violence for years.

The move to consider bitcoin legal tender received praise from the crypto community, and was hailed as another step toward mainstream adoption of cryptocurrencies.
But it can also be viewed as controversial. There were protests in El Salvador after the country introduced the Bitcoin Law, and the country faced criticism from the International Monetary Fund.
The IMF has urged El Salvador to drop bitcoin as legal tender, raising concerns over the risks it poses to financial stability and consumer protection.

Read more about cryptocurrencies from CNBC Pro

Bitcoin is a notoriously volatile asset, which raises questions about its role as a standard method of payment. It was last trading at around $39,686 Thursday, down 6% in the last 24 hours. The cryptocurrency has lost around 42% of its value since an all-time peak above $68,000 in November.
Many Western governments have raised the alarm about the potential use of cryptocurrencies by Russia to evade sanctions amid the country’s invasion of Ukraine.
CAR is a close ally of Russia, with Russian mercenaries having provided direct assistance to the government, according to the UN.

Experts suggested the move could help small countries like the CAR reduce their dependence on the U.S. dollar for global trade.
Ransu Salovaara, CEO of crypto platform Likvidi, noted that the dollar has been the global oil currency since the 1950s.
“Oil dependence is a major issue now, because of the Ukraine and the SWIFT banking ban, so global, unstoppable cryptocurrencies like bitcoin can really shine,” he added.

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