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Daily Agenda: Greece’s Unfinished Business

HSBC and Deutsche Bank consider significant shake-ups; Apple to report earnings today; Volkswagen chair steps down.

In Europe, the Greek drama continues to fester as Athens remains defiant despite reports that its cash reserves are nearly fully depleted. A move to secure temporary funding by raiding municipal coffers has proven controversial with the Greek electorate. Members of the Syriza-led administration are finding themselves under immense pressure, without undermining their political platform, to meet European Union leaders’ demands.

Japan downgraded. Fitch Ratings downgraded Japan’s sovereign debt ratings by one step from to A from A-plus. Fitch analysts cited a failure for political reform to match the massive stimulus programs underway at the Bank of Japan as a primary factor in the decision.

Apple to report quarterly earnings. Apple’s first-quarter 2015 release, to be announced after equity markets close today, will be a focus of U.S. market narratives. The company faces a high hurdle after the final quarter of 2014, during which the tech company’s net profits rose to an unprecedented $18 billion. Last week, the Apple Watch, its smart watch, was made available for retail sale.

HSBC mulls move. Shares of HSBC stock listed in Hong Kong rose today on reports that emerged Friday that the bank is considering a withdrawal from the U.K. to secure preferential tax treatment elsewhere. The iconic financial institution’s first branches were founded in 1865 — its initials are derived from Hong Kong and Shanghai Banking Corporation. Many analysts see Hong Kong as the most likely location for a new headquarters.

Volkswagen chair resigns. In a surprise move, longtime Volkswagen chair Ferdinand Piech resigned over the weekend under board pressure. German media reports indicate that Piech had unsuccessfully fought to topple CEO Martin Winterkorn. Piech is the grandson of Porsche founder Ferdinand Porsche and has spearheaded his family’s interests in the automotive industry for decades.

Deutsche Bank announces overhaul. Frankfurt–based Deutsche Bank announced a restructuring program that will reduce assets by €200 billion ($216.7 billion) and cost almost €4 billion in one-time charges as the firm attempts to streamline operations. The bank beat analyst estimates for the first quarter of the year, despite a large charge for costs related to a settlement with regulators over Libor rate fixing.

Portfolio Perspective: China’s Stock Market Relying on ReformNorman Ho and Philip Li, The Asia Pacific Fund

Chinese equities have been on tremendous run over the past few months, underpinned by easing measures by the People’s Bank of China (PBOC) and strong investor sentiment on the mainland. Despite the strong rally, we think that the long-overdue recovery in China-related stock markets has only just begun.

At the National People’s Congress meeting in March, China announced that it was lowering its economic growth target for 2015 to 7 percent, a widely anticipated move to achieve soft landing. As economic data deteriorated early this year, Premier Li Keqiang called for “more forceful” fiscal policy and “appropriate” monetary policy to stabilize growth. The PBOC announced an across-the-board reserve requirement ratio cut and a symmetric interest rate cut in February. The central bank also relaxed property measures further in March by lowering the required down payment for second-home buyers to 40 percent from 60 percent.

We recognize that many investors remain wary about the China story, particularly as the country’s development model matures, resulting in a slower growth rate. No doubt, it is going to be a volatile market. But at this point of the cycle, a combination of monetary loosening and reform measures has drawn capital into the equity market, keeping the market red hot. It is unsurprising that regulators are worried that a potential bubble is forming and the government may seek to divert capital out of the A-share market. One diversion for the strong capital flows in China’s A-share market is the Hong Kong stock market, which has been trading at an attractive discount to A-shares.

We expect Chinese capital markets to open even further, thanks to the proposed Shenzhen-Hong Kong Stock Connect, as well as the potential A-share inclusion in international indexes. While it is only four months into the year, we are looking forward to a stronger market environment, which is particularly beneficial to value investing as investors are less focused on a few smaller fast-growing sectors but more focused on the merits of each company on a fundamental basis.

Norman Ho and Philip Li are co-managers of The Asia Pacific Fund, a closed-end fund headquartered in Hong Kong.

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