Hope all is well!

Inside ETFs Review:

My personal highlight was Michael Lewis interview by Barry Ritholtz. I read Liar’s Poker in high school which spurred my interest in finance and led to me talking a job with Salomon Brothers Asset Management. It was a great interview and reminded me I need to read his more recent books such as the Undoing Project, Flash Boys and The Fifth Risk as Moneyball and The Big Short are two of my favorite books. He spoke on the latter three at length and all seem very compelling. When asked about his personal investments, he invests in index funds which got a healthy cheer from the crowd.

I had the privilege of sitting on a panel moderated by Bob Pisani of CNBC with Jurrien Timmer of Fidelity and Mary Ann Bartels of Merrill Lynch. It was a honor to be with two people I have followed and respected for many years. The general view is US equities are fairly valued and money is rotating into non US though Europe has many questions marks. In general there was a positive view on Emerging Markets. Emerging market ETF flows have been massive though my take was broad based emerging markets is allocated to 24.5% financials with another 20% allocated to energy, industrials and materials. Nearly half of EM goes into non-growth or commodity related sectors. As we have seen in China, we want to capture domestic consumption as it takes place online within the emerging markets universe. I believe a more nuanced EM strategy is a better play.

Hang Seng overcame morning losses to eek out a +0.1% gain of 27 index points on strong volume near the 1 year average on mixed breadth of 24 gainers and 21 decliners. Trade talks continue to dominate headlines with high level meetings taking place later this week. AIA slumped -1.88%/-50 index points while the Hong Kong Stock Exchange jumped +4.88%/+38 index points on MSCI’s decision to include more Chinese companies in their February index review. Inclusion names such as Meituan Dianping slumped -4.09% and Xiaomi -0.93% on the classic buy the rumor and sell the news. Inclusion name Tencent Music did jump +2.24%. The Hang Seng’s only healthcare company CSPC Pharama gained +5.45%/10 index points on news the VAT tax on several cancer and related drugs will cut from 16% to 3%. Within the MSCI China All Shares’ HK stocks, healthcare gained +3.47%. While the Hang Seng has one healthcare stock, the All Shares has 20 Hong Kong listed stocks. Consumer discretionary gained +1.93% as autos rallied following strong results from Geely which reported January sales increased 2% year over year and 70% month over month. Tech was strong +1.35% while real estate was a stand out to the downside off -1.42%. Early reports are Golden Week sales may have been weak. Southbound Connect volumes were very strong in mixed trading though volume leader Geely had nearly 2 to 1 buyers.

Shanghai & Shenzhen gained +0.68% and +1.2% on above average volumes and strong breadth. As the South China Morning Post commented that mainland investors have been struck with fear of missing out (FOMO). Within the MSCI China All Shares’ mainland stocks, healthcare gained +3% (as a FYI there are 41 healthcare names in the index) followed by tech +1.21%. Tech companies have higher revenue exposure to the US. Northbound Connect was quite strong again as foreign buyers continue to buy. This is a very interesting trend.

As we mentioned yesterday Hong Kong listed Meituan Diangping & Xiaomi had an outsized gain yesterday on speculation MSCI would allow dual share class listings. MSCI indices have two big Semi-Annual Rebalances on June 1 and December 1 while there are two quarterly adjustments in March and September. The following is MSCI’s listing of companies that will eligible for inclusion in the March quarterly rebalance. The importance? MSCI has $14.8 trillion of active and passive assets benchmarked to their indices. Within the $14.8 trillion, $3.4 trillion is invested passively via ETFs and index funds. The Chinese companies being added will go into MSCI China, Emerging Markets, Asia Ex Japan, All Country World ex US and All Country World. MSCI EM has $1.4 trillion (as of June 2018, most recently reported) benchmarked to it split between $1.4 trillion active and $410 billion passive. The latter will have to mechanically buy these stocks while the active managers will need to evaluate them. MSCI does report their ETF AUM monthly which has swelled to $758 billion at the end of January from $744 billion in June 2018. I suspect the massive inflows into EM ETFs were a big contributor.

• ALTICE USA A (US)
• KKR & CO (US)
• MEITUAN DIANPING B (CN)
• PINDUODUO ADR A (CN)
• XIAOMI CORP B (CN)
• TENCENT MUSIC ENTERTAINMENT A ADR (CN)
• ZTO EXPRESS ADR A (CN)
• IQIYI ADR A (CN)
• BILIBILI ADR Z (CN)

PBOC announced their gold holdings increased by 59 million ounces in January to 1,864 metric tons according to an onshore broker.

CNY 6.77

The curve flattening last a day as the short end yield came in.

• Yield on 1 Day Chinese Gov’t Bond 1.58%
• Yield on 10 Year Chinese Gov’t Bond 3.10%
• Yield on 10 Year China Development Bank Bond 3.69%

Commodities were lower on both the Shanghai & Dalian commodity exchanges