Policy Articulated, China ETF Flows in China, Factor Performance in the Mainland
Hope you had a great three day weekend.
Key News Overnight
- A Friday policy meeting indicates China’s recent strong economic releases will lead to a stimulus tempering. The market had a negative reaction to the statement including terms such as “structural deleveraging and prevent speculation in the property market”. I believe this is an overreaction as the vast majority of the statement discusses the challenges the economy faces. Fiscal and monetary support will continue though we are not apt to see further measures. China’s domestic agenda of slower but healthier GDP growth was sidelined due to the trade war. With a trade war resolution and economic stimulus impacting the real economy, it is clear we should anticipate the domestic agenda of deleveraging, SOE reform and addressing environmental concerns returning in the months ahead.
HK Closed for Easter Monday
Shanghai & Shenzhen declined -1.7% and -1.51% on moderate volume 2X the 1 year average and +11% from Friday. Breadth was poor with decliners leading advancers 3 to 1 as 2,605 declined to 987 advancers. Mega/large caps underperformed small and mid-caps. Mainland stocks in the MSCI China All Shares declined -2.18% as real estate dropped -5.05% on the return of President Xi’s housing is for living mantra from two years ago. Consumer discretionary and financials were victims of profit taking falling -3.39% and -2.85% while industrials and healthcare were off -2.27% and -materials -2.26%. Energy “outperformed” -0.33% on crude’s strength. Stock Connect was closed due to the HK holiday.
Equity ETFs in China received $319mm of inflows last week according to Bloomberg data. While YTD flows are still negative $4.3B, it gives you a sense of the potential inflows that are and could come back into equities. Two ETFs are accounted $2.6B of outflow. There redemptions were heavily concentrated in January just as the market reversed higher. Apparently market timing is difficult in China as these outflows painted the low. Both ETFs have seen a stabilization with one receiving $406mm of inflow in the last week though the second experienced an additional $119mm of outflow. There was a big outflow last week in a mid-cap ETF of $197mm.
Over the weekend I read a review of Q1 factor performance in China’s mainland market from a research firm. Despite a strong January, Q1 quality factors underperformed as the market’s rise has lifted all boats. The mainland market historically was dominated by momentum (technically called “reversal”) and size factors (small caps outperforming large caps). These factors had fallen out favor since the MSCI decision to include Chinese A Shares in their benchmark as high dividend yield, high earnings momentum, high return of equity and low volatility factors began out to outperform. These factors did well in January but have fallen to extreme levels of underperformance while momentum and size have vastly outperformed. Both sets of factors are the tails of their bell curve though at opposite ends. The firm believes these factors will revert to their mean which could be interpreted as mega/large caps outperform mid/small. Time will tell!
CNY 6.71 versus 6.70 yesterday
- Yield on 1 Day Chinese Gov’t Bond 1.86% versus 1.96% yesterday
- Yield on 10 Year Chinese Gov’t Bond 3.40% versus 3.39% yesterday
- Yield on 10 Year China Development Bank Bond 3.83% versus 3.81% yesterday
Commodities were higher on the Shanghai & Dalian Exchanges with Dr. Copper -0.02%