Key News

Asian equity markets followed US equity markets higher as investors cheered US-Iran de-escalation with every country rallying today. An Asian based broker noted the very strong advance/decline in Japan overnight while Korea had an outsized gain. Hong Kong and China had a strong day as PPI/CPI data was released pre-market. It is also worth noting that we saw confirmation chief trade envoy Vice Premier Liu He will visit DC next week. Chinese healthcare stocks had a strong day following reports of a pneumonia outbreak in Wuhan. Chinese electric vehicle and auto names are having a nice run riding Tesla’s coat tails.

It was also a strong day for Northbound Connect inflows. Foreign investors bought more than $1 billion worth of Mainland stocks today, which raises the total inflow from November 1^st to over $23 billion. Foreign trading still accounts for only ~4% of Mainland trading on a daily basis versus most foreign markets, in which it accounts for at least 20%. It is also worth noting the strong performance of the renminbi. I couldn’t help but notice that the 1-year volatility of the renminbi is less than euro, yen and pound. Compared to the pound, which is has been battered by Brexit uncertainty, the renminbi has been half as volatile. One Asia broker estimates that the renminbi could rally to 6.85. Having attended an institutional investor conference focused on emerging market investing Tuesday and Wednesday I believe there may be even more upside based on the sentiment of the attendees. A small segment of attendees have done very well in China via private equity that increasingly has become public stocks.

CPI & PPI

December Year over Year

Takeaway: This data was released prior to the market’s open though both were minor positives going into a strong day led by US-Iran de-escalation. CPI has been elevated due to the African swine flu that led to the slaughter of China’s pig population. Food prices were still up 17% year over year, though we are beginning to see pork prices stabilize. The PPI was negative, but the rate of decline is slowing as China’s late Q4 economic data shows improvement, bolstering the view that China’s economy has troughed. With a US-China Phase One trade deal to be signed next week, we could see a nice pickup in 2020 (fingers crossed). A local media firm noted its poll of Chinese economists went positive for the first time in six months. 5.96% is the average China GDP forecast for 2020 which is eerily similar to the World Bank’s China forecast, though well above the global growth estimate of 2.2%. Don’t let the nattering nabobs of negativity push the sub-6% hysteria as the reality is that the value of China’s GDP in 2020 will be the highest ever!

H-Share Update

The Hang Seng opened higher and moved from the lower left to the upper right +1.68%/+473 index points to close at 28,5561 on strong volume above the 1-year average though off slightly day over day. Breadth was very strong with 48 advancers and just two advancers led by Tencent +2.09%/+65.1 index points, AIA Group +2.15%/+61.4 index points and China Construction Bank +1.68%/+36.6 index points.

The day’s best performer Hengan International +8%/+10.2 index points with Apple supplier Sunny Optical +6.66%/+20.2 index points following an analyst upgrade and pork producer WH Group +5.15%/+12 index points. PetroChina was off -0.97%/-2.5 index points and Sands China -0.12%/-0.43 index points. China-domiciled stocks listed in Hong Kong represented by HS China Enterprises +1.82% slightly outperforming Hong Kong-domiciled stocks listed in Hong Kong and represented by the HS HK 35 +1.6%. MSCI’s definition of Chinese domiciled companies listed in Hong Kong within the MSCI China All Shares Index gained +2.03%. Tech had a great day +4.01%, discretionary +3.12% led by sport maker Li Ning (2331 HK), which rose +9% following positive analyst comments. Autos had a good day, staples +2.97%, industrials +2.09%, communications +2.09%, healthcare +1.94%, financials +1.85%, real estate +1.72%, utilities +1.68%, materials +1.03% and energy +0.29%. Southbound Connect volumes were moderately high with buyers outpacing sellers by a small margin. Volume leader Tencent had sellers outpace buyers by a small margin while CCB had 2 to 1 buy to sells and Xiaomi 5 to 1 buyers to sellers. Mainland investors bought $175mm of Hong Kong stocks (buys net of sales) while Southbound activity in Hong Kong accounted for just over 6% of HK turnover.

A-Share Update

The Shanghai & Shenzhen had a strong day +0.91% and +1.75% on strong volumes well above the 1-year average though off day over day. Breadth was incredibly strong with 3,328 advancers and only 453 decliners as small and mid-caps outperformed large caps by ~1%. The Mainland stocks within the MSCI China All Shares Index gained +1.53% led higher by tech +3.21%, healthcare +3.01%, real estate +2.2%, discretionary +1.92%, staples +1.44%, industrials +1.29%, financials +0.96%, communication +0.95%, utilities +0.54% and materials +0.31%. Energy was off -0.46% on de-escalating US-Iran tensions. Northbound Connect volumes were high as foreign investors were very strong buyers. Shenzhen Connect volume and buying exceeded its older sibling the Shanghai once again. Kweichow Moutai was the volume leader seeing 3 to 1 buying. Investors bought a total of $1.089 billion of Mainland stocks today! Wow!

Baidu (BIDU US) announced it would explore a Hong Kong listing following recent announcements from NetEase and Trip.com.

Education stocks New Orient (EDU US) and TAL Education (TAL US) report next week.

Last Night’s Prices & Yields

• USD/CNY 6.93 versus 6.95 yesterday
• CNY/EUR 7.70 versus 7.73 yesterday
• Yield on 1-Day Government Bond 1.42% versus 1.42% yesterday
• Yield on 10-Year Government Bond 3.12% versus 3.13% yesterday
• Yield on 10-Year China Development Bank Bond 3.57% versus 3.58%
• Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper flat at 0.35%