TGIF! Hope all is well! 

Key News

• Very quiet with the mainland markets still closed and many HKers taking the week off with the Wednesday holiday. 

The Hang Seng opened lower following a down US equity market hitting a mid-morning low of -0.89% but HSBC’s mid-day earnings beat drove the benchmark higher closing at the day’s high +0.46%/+137 index points to close at 30,081. Breadth was strong with 38 advancer and 11 decliners though volumes were off -6% day over day in very low trading volumes representing 2/3 of the 1 year average. The Hang Seng ended the week +1.8% in a nice divergence from the US equity market. HSBC gained +2.12%/+65 index points accounting for nearly half of the indice’s move. The irony is HSBC is technically a UK domiciled bank! While it is included the Hang Seng due to its significant China/HK presence, the global bank’s HK listing (5 HK) is not considered a Chinese nor HK company. Tencent was weak -0.92%/-28 index points on no news though Hang Seng Bank had a strong day +4.01%/+19.6 index points after declaring a greater than expected dividend. Hang Seng Bank (11 HK) as HK domiciled company is in MSCI HK and not China. Two of the best performing stocks are not considered Chinese companies so the HK stocks within the MSCI China All Shares gained +0.04% led higher by healthcare +1.13%, tech +0.94% as Apple suppliers and semis continue to rebound and surprisingly strong April handset volumes from Xiaomi and discretionary +0.9% led higher by auto names which had been weighed down by a Morgan Stanley downgrade earlier in the week. Energy declined -0.71 as oil collapses while Tencent dragged Communications -0.67%. Xiaomi reported Q1 phone shipments was 27.5mm which exceeded analyst expectations. Xiomi, the world’s 4^th largest mobile phone maker, has historically benefited from Apple’s lack of innovation and lower price though it has other domestic players nipping at their heels such as Vivo and Oppo. Southbound Connect was closed.

Shanghai & Shenzhen were closed.

The SCMP had an interesting article on the Chinese Securities Association of HK’s president requesting HK’s pension fund, the Mandatory Provident Fund with $109B of AUM, be allowed to invest in Chinese A Shares. While allowed to invest 40 overseas stock exchanges surprisingly they are not allowed to invest in SH & SZ stocks. Seems like a no brainer to me!

PDD lock up expires May 9^th.

UBS had an fascinating report noting that EM equity ETFs have garnered 98%/$269B of the $274B of EM inflows from Q1 2016 through Q1 2019. Active EM mutual funds have seen a outflows of $46B over the time period as EM index funds garnered $40B. I’ve not read the full report due to time constraints though I am looking forward to it. The importance is highlighted by today’s note on HSBC and Hang Seng Bank being included in the Hang Seng Index but not MSCI China. It isn’t “wrong” that they aren’t though it shows the importance of understanding index methodology and exposures. For broad based EM investors, MSCI EM has a value bias due to the high weights in financials, energy, materials and industrials (~45%). If growth continues to outperform one has only 27% exposure to tech and communications. I believe this is why EM has underperformed the S&P 500 by a very significant percentage over the last decade. It isn’t that EM is out of favor but EM is value which is very much out of favor. For instance, how can banks make money in a flat/inverted yield curve?

Next week is a busy one for Chinese economic data. As previously mentioned we have a meeting with CICC’s Chief China Economist Dr. Liang, MSCI’s head of Asia research and the Shenzhen Stock Exchange. Looking forward to reporting insights next week!

• Monday Caixin Service PMI
• Tuesday FX Reserves
• Wednesday Export/Import Data
• Thursday CPI
• Friday M2, Loan and Financing

CNY 6.73 versus 6.73 yesterday

• Yield on 1 Day Chinese Gov’t Bond 1.92% Tuesday versus 1.92% Monday
• Yield on 10 Year Chinese Gov’t Bond 3.43% Tuesday versus 3.44% Monday
• Yield on 10 Year China Development Bank Bond 3.81% Tuesday versus 3.84% Monday

Commodities were higher on the Shanghai & Dalian Exchanges with Dr. Copper +0.08% on Tuesday