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Mixed Markets, US China meeting confirmed at G 20 Finance Minister, Naspers CEO Comments

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Hope all is well! 

May Caixin China PMI Services: 52.7 versus 54 estimate and April’s 54.5 

Takeaway: The service sector expanded in May albeit at a slower growth rate versus April’s strong reading. Readings above 50 indicate expansion while under 50 contraction in activities. Employment increased for the eight month in a row though the pace curtailed from 51.4 to 50.4. Similar to the “official” Non-Manufacturing PMI which remained at 54.3 month over month in May, the service sector remains quite strong as the primary beneficiary of stimulus. While market sentiment is weak, the strong Q1 earnings from Chinese internet and e-commerce are a clue for where investors should be focused (in my opinion). 

Key News

  • Asia followed the US equity market higher though export heavy Korea and Taiwan had modest positive returns following Fed Chairman Jay Powell’s comments on a potential Fed rate cuts and oversold conditions. The irony is that interest rate cuts might be necessary as the trade war’s effect was exhibited by the US April Manufacturers New Orders fell -0.8% month over month and April’s number was revised lower. The World Bank lowered its global growth target to 2.6% from their January estimate of 2.9% while lowering China’s GDP forecast to 6.1% from 6.2%. Both HK and the mainland markets opened higher though gains eased over the course of the day.
  • The Treasury Department confirmed that Steven Mnuchin will meet PBOC Governor Yi at this weekend’s G-20 finance minister meeting in advance of the month end G-20 summit. This could pave the way for Trump Xi meeting at month end at the G-20.
  • CNBC had a great interview with Naspers CEO Bob van Dijk that is worth reading. The South African company is famous for investing $32 million in Tencent back in 2001. Arguably the best trade ever, the 31% stake is now worth $126 billion. Van Dijk described the price action Chinese technology companies due to the trade war as a “bloodbath” though the fundamentals of China’s economy remain “very, very strong”.  He stated further that “…if you take a 10-year view, which is what we typically do, the market is there, the innovation is there, so I think the long-term future is bright.” I couldn’t agree more though I would disagree that Chinese internet and e-commerce companies are tech companies. The companies are the transmission engines for China’s domestic consumption as it occurs online.
  • Chinese healthcare companies in both HK and mainland were down ~-2.5% due to the audit of seventy seven domestic and foreign healthcare stocks mentioned yesterday. Additionally it was announced overnight that the drug procurement trial would be implemented nationally. The winner take all trial auctions have put significant pressure on prices. One healthcare analyst we have met with believes that the recent drawdown is apt to provide opportunities for long term investors. I will do some further work as he had previously recommended using valuations as a trading tool. 

The Hang Seng opened up +1.32% but eased to close +0.5%/+133 index points on light volumes below the 1 year average and decent breadth of thirty six advancers and thirteen decliners. The index was led higher by AIA +2.15%/+57.4 index points, Tencent +1.16%+30.8 index points and HSBC +0.86%/+24.6. The tone of most brokers has improved over the last several days as the index finds supports at these levels. Selling appears to have exhausted itself of late as compelling valuations bring some buyers in. The MSCI China All Shares’ HK stocks gained +0.44% as AIA is not a Chinese company due to its HK domicile though tech rebounded 2%, real estate +1.44% on a potential Fed cut (HK $ is pegged to the US $), Tencent and China Tower pulled communications +0.99% and discretionary +0.81%. Healthcare was off -2.62% and energy -0.11%. Southbound Connect volumes were light though mainland buyers outpaced sellers. Volume leader Bank of China saw selling while ICBC saw outsized buying and Tencent saw more buyers than sellers. 

The Shanghai and Shenzhen also opened higher but slid on continued trade war concerns to end -0.03% and +0.04% on light volumes below the 1 year average though breadth was surprisingly strong with 2,238 advancers and 1,246 decliners. Mega, large, mid and small caps were uniformly mixed on the day. The mainland stocks within the MSCI China All Shares gained +0.02% led higher by real estate +2.01%, communications +1.71% on continued 5G rollout optimism and energy +0.41% though healthcare was off -2.91% and staples -0.32%. Northbound Connect volumes were light though foreign investors purchased $442mm of mainland stocks overnight. Volume leader Jiangsu Hengrui Medicine saw 2 to 1 selling though Ping An saw 2 to 1 buying while Kweichow Moutai had buyers slightly outpace sellers. Appliance maker Midea Group saw 2 to 1 selling from foreigners though air conditioning maker Gree saw buying on the day. 

Shanghai approved three companies to list on the new Shanghai Science & Tech Innovation Board. 

  • CNY 6.90 versus 6.90 yesterday
  • Yield on 1 Day Chinese Gov’t Bond 1.68% versus 1.72%
  • Yield on 10 Year Chinese Gov’t Bond 3.25% versus 3.24%
  • Yield on 10 Year China Development Bank Bond 3.73% versus 3.72%
  • Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.28%