Apologies for no note yesterday and today’s late arrival. We had an opportunity to meet with a firm out west yesterday on short notice. I was up at 4:30 am and got home at 1 am last night for an arduous day trip. 

Key News Overnight

• Several minor issues weighed on the equity markets such as US equity weakness, stronger US dollar, a weak South Korea GDP print on semiconductor export weakness, and profit taking ahead of next week’s Labor Day holiday on May 1 (HK closed next Wednesday while mainland closed Wed, Thur & Fri). There were two larger news items: PBOBC Deputy Governor Liu Guoqiang reiterated that China’s economy is running neither not too hot nor too cold. Investors are potentially overreacting as targeted fiscal and monetary support will continue. This is evidenced by Wednesday’s liquidity injection by the PBOC. HK’s afternoon weakness was attributed to reports that regulators are looking at HK financial institutions facilitating mainland investors utilizing HK margin to buy via Northbound Stock Connect. While margin trading is heavily scrutinized in the mainland, HK, like other global financial capitals, can provide financing. The simple reality is the market has been overdue to a correction after a very strong Q1 as the massive valuation gap has closed to some degree. The next leg higher will be driven by corporate earnings reflecting the positive effect of stimulus in the economy. We have had 1,500 companies report out of nearly 4,000. I’ll provide an overview tomorrow as the numbers for the most part have been good. Another catalyst will be MSCI’s first 2019 China A inclusion at the end of May.
• The US trade team will travel to Beijing next week though it is amazing how the trade war has fallen out of the spotlight.

The Hang Seng sold off in the afternoon to close down -0.86%/-256 index points at 29,549. Volumes were only slightly above the 1 year average and declined 1% day over day. Breadth was off with only 11 advancers and 35 decliners led by Tencent -2.6%/-79 index points, Ping An -2.12%/-32 index points and CCB -0.72%/-16 index points. HK stocks within the MSCI China All Shares declined -1.77% led by tech -3.3%, discretionary -2.42% and communications -2.34%. Energy and utilities “outperformed” with declines of -0.26% and -0.7%. Southbound Connect volumes were light in mixed trading though volume leader Tencent saw 1.5 sellers to buyers. 

Shanghai & Shenzhen were off -2.43% and -3.41% as the Shanghai Comp closed at 3,123 as we’ll find out tonight if the 3,100 level will hold. Volumes were higher 12% day over day though not quite 2X the 1 year average as only 444 stocks advanced while 3,169 declined. Small/mid caps fell almost 2X the performance of large/mega caps as several mainland mid and small cap indices were off nearly 4%. The mainland stocks in the MSCI China All Shares were off -2.66% led lower by tech -4% and communication -3.94%. Foreign investors pulled -$252mm last night from mainland stocks as profit taking ruled the day. MSCI inclusion stocks Kweichow Moutai and Ping An Insurance experienced sellers outpacing buyers but not by large margins. 

Tuesday we attended MSCI’s 30 year anniversary of the MSCI Emerging Markets Index launch. CEO Henry Fernandez rang the NYSE closing bell and then held a closed-door forum with a dozen institutional investors. It was a great event and honor to participate! MSCI released a white paper on The Future of Emerging Markets for the occasion which I recommend reading. 

Key white paper points are:

• At launch, MSCI EM comprised of 10 countries and made up less than 1% of the world’s market cap. Today there are 24 countries comprising 12% of the world’s market cap.
• EM is inexpensive on a relative and historical basis to developed markets.
• China’s weight within EM is expected to grow from 30% to over 40% with the inclusion of Chinese A shares. The weight could lead investors to creating a dedicated China allocation.

TAL Education reported solid Q4 and fiscal year 2019 results that beat both top line and bottom line estimates.

• Revenue $726mm versus estimate $682mm
• Adjusted EPS $0.20 versus estimate $0.15
• Student enrollment increased +71% year over year to 4.4mm from 2.6mm
• Q1 Forecast $699mm to $710mm

Kweichow Moutai reported Q1 that exceeded analyst expectations. I’ve not reported an A shares company earnings previously. For comparative purposes Diageo reported $8.9B in Q1 revenues.

• Revenue 22.48 billion (~$3.3B)
• Net Income 11.2B (~$1.6B)
• EPS 8.93 (~$1.32)

Hermes reported Q1 results this morning in Paris. While revenue rose 16%, Asia Ex Japan grew 17% driven by “extremely good sales growth driven by mainland China”. While US sales grew 10%, France 1.4% and Europe ex France 9.5%, what surprised me was that Asia Ex Japan is by far their largest revenue generator. Asia Pacific ex Japan was 655mm euros versus France 184mm euros, Europe ex France 261mm, Japan 202mm and Americas 269mm. The company did open its latest US store in Orlando so we can now buy an expensive handbag while visiting Disney. 

CNY 6.74 versus 6.71 Tuesday

It is interesting to see FI prices continue to weaken during the equity correction.

• Yield on 1 Day Chinese Gov’t Bond 2.05% versus 1.97% Tuesday
• Yield on 10 Year Chinese Gov’t Bond 3.46% versus 3.41% Tuesday
• Yield on 10 Year China Development Bank Bond 3.84% versus 3.82% Tuesday

Commodities were surprisingly strong on the Shanghai & Dalian Exchanges with Dr. Copper +0.45%