Daily Posts

Huawei Olive Branch, Rare Earth Reminder, National Social Security Fund Increases Equity Holdings 71% in Q1, Xiomi Earnings Beat

Hope all is well! 

Key News Overnight

  • The S&P 500 didn’t breach 2,800 though we did see a policy pivot regarding Huawei after a steep US equity market decline yesterday. The Commerce Department announced after the US market close there would be a 90 day “reprieve” as reported by the WSJ. It is difficult to ascertain if the Nasdaq’s 1.46%/semis 4% drop was a factor though it provides an opportunity to get trade talks going.
  • President Xi & Vice Premier and trade envoy Liu He visited a rare earth metals company in southeastern China Monday in a not so subtle reminder that China controls 90% of global rare metal supplies. Investors bought HK and mainland rare earth companies despite the irony that if China banned/curtailed exports to the US it would hurt the companies! These companies tend to be small caps so buyer beware.
  • Yesterday was a very poor day for US listed Chinese internet and e-commerce companies. What does internet and e-commerce have to do with a trade war? They have little to no revenue growth to the US. They are geared to domestic consumption which by all appearances appears to be holding up fine and poised to benefit from the VAT tax cut and other stimulus. One factor I’ve noticed is the media keeps calling these companies tech companies which they are not. They tend to fall into the communications sector while hardware and software companies are technology. It does not appear that US listed companies are big buyers of US technology/semiconductors in looking at their supply chains. Another factor impossible to prove is that high frequency trading targets US listed Chinese companies whenever trade news hits the tape. Lastly active mutual fund managers are hesitant to hold China names during a trade war.
  • The South China Morning Post had a front page article on China’s National Social Security Fund increasing the number of shares it owns by 71% in Q1 from year end 2018. The article states that only 15% of the NSSF is invested in stocks with the remainder in bank deposits or government bonds. China’s pension plan is undergoing numerous reforms including a break in the contributions required by companies to pay into on behalf of their employees as a stimulus measure. In order to generate higher returns, the plan is taking on more equity stakes as evidenced by the NSSF becoming a top ten shareholder in 300 mainland stocks. Another step is transferring SOE assets to the NSSF and other pension plans as a pension funding mechanism that also allows the new owners to receive dividends (there is no “loss” of the assets as the state already owned them). China needs to dramatically raise the AUM and returns of the plan to keep up with demographics. Reforming pension plans and allowing great equity ownership would greatly help in funding and also institutionalizing the mainland market. I tried to verify the statistics in the article which I found difficult on my Bloomberg terminal.

The Hang Seng gave up morning gains driven by sell analyst upgrades in an afternoon slide to end -0.47%/-130 index points on mixed breadth of 19 advancers and 31 decliners on light volumes below the 1 year average. The index has dipped below 28k driven lower by AIA -2.28%/-62 index points, conglomerate CK Hutchison -3.44%/-21 index points and energy giant CNOOC -2.05%/-14.7 index points. AIA and CK are HK domiciled companies they are not considered Chinese companies. I do believe the 47 stocks with ~$600B market cap held by MSCI Hong Kong will be added to MSCI China’s $1.7 trillion of market cap at some point though MSCI has no such plans (yet). The HK stocks within MSCI China All Shares gained +0.12% led by materials +1.26% on the rare earth rocket and tech on the Huawei reprieve +1.03% after their CEO saying the company could weather US actions. Energy and utilities eased -0.96% and -0.77%. Southbound Connect volumes were light but buyers outpaced sellers with volume leader Tencent seeing outsized buying.

Shanghai & Shenzhen rebounded on the Huawei reprieve +1.23% and +1.77% on light/moderate volume and strong breadth of 3,222 advancers and 402 decliners. Small/mid cap stocks rebounded stronger than large caps though it was a very broad rally with all sectors in the green. It is worth noting that the Shanghai and Shenzhen are sitting on technical support levels. Within the MSCI China All Shares’ mainland stocks, materials gained +2.78% on the rare earth company visit, tech rebounded +2.57%, communications gained +2.43% led by telecom stocks, industrials +1.61%, discretionary had a strong day +1.6% as autos rebounded on talk of VAT leading to a rebound in sales, and staples gained +1.2% led by food/beverage/alcohol. Despite the strong day foreigners sold $533mm of mainland stocks via Northbound Connect trading on light volumes.

Xioami (1810 HK), the world’s 4th largest maker of mobile phones, gave up early gains to ease -0.2% after reporting stronger than expected revenues and income. It is interesting that investors sold the stock despite the earnings.

Ctrip and Vipshop are expected to report earnings tomorrow.

  • CNY 6.90 versus 6.91 yesterday
  • Yield on 1 Day Chinese Gov’t Bond 2.25% versus 2.25% yesterday
  • Yield on 10 Year Chinese Gov’t Bond 3.32% versus 3.30% yesterday
  • Yield on 10 Year China Development Bank Bond 3.76% versus 3.74% yesterday
  • Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper -0.06%