Key News

Asian equity markets were off overnight except for Mainland China, Taiwan, and Indonesia. Investors largely sold off risk assets following escalating tariffs on Argentina and Brazil, tariff threats on French goods, and the potential deterioration in US-China trade talks.

The Art of the Deal is in full view as the US threatens maximum pain in advance of escalating tariffs on December 15^th and this morning’s threat of waiting for after the elections to sign a deal. Escalating tariffs would likely have a detrimental effect on US equity markets, which have baked in a phase one trade deal. China has vowed retaliation if Congressional legislation aimed at China’s treatment of Muslims in the Xinjiang region is passed. Releasing an “unreliable entity” list would ban US companies from doing business in China. It is worth noting that the above threat was only released to Western media, which indicates that this is a negotiating tactic on their part. Drama aside, our contention remains that both sides would benefit greatly from getting a deal done by December 15^th.

Mainland Chinese stocks were boosted by the positive performance of auto companies on reports that EVs could be 25% of Mainland auto sales by 2025. Gree Electric Appliances (000651 CH) popped 5.35% as the company confirmed prestigious investment firm Hillhouse would take a 15% in the air conditioning company. Thus, markets were quite resilient despite all of the negatives.

Index Inclusion Update

There are now 472 Chinese A-shares within MSCI indexes, broken down between 244 large caps and 228 mid-caps, which, along with US and Hong Kong-listed companies, bring the total number of Chinese companies to 710. China’s percentage weight now comprises 4% of the All Country World Index (ACWI) and 34% of the Emerging Markets Index (Taiwan 11.72%, South Korea 11.56%, India 9.12% and Brazil 7.15%).

MSCI will go on a global consultation to hear how the 2019 inclusion went with its clients. MSCI reiterated that there are four key changes they would like to see made to the trading procedure for Chinese A-shares:

1) that MSCI China A Index futures become available

2) that Chinese A-shares settle on global standards (Currently Chinese A-shares settle on trade date instead of the global equities settle trade date plus two days, which is the standard)

3) that trading holidays become aligned between the Mainland and Hong Kong

4) that multiple accounts may be aggregated into one trade

3 & 4 shouldn’t be too much of an issue. The HKeX announced in March that MSCI would list China A futures, but nothing has been mentioned since. 2 is going to be the most difficult as, in theory, China needs to slow down on trade settlement to harmonize with the rest of the world. It is also important to note that Chinese exchanges have been quick to implement changes suggested by MSCI, so these changes should occur without a hitch. The political environment was left unmentioned, which was probably smart. MSCI CEO Henry Fernandez is a force of nature who, I believe, recognizes that integrated capital markets foster communication, which the US and China need now more than ever. At the same time, MSCI is beholden to their clients, who overwhelmingly want to see further integration and frictionless trading procedures between Chinese and global markets.

H-Share Update

The 50 stocks within the Hang Seng opened with a thud, falling -1.44% after Hong Kong retail plunged 24% in October year over year, though clawed back for a -0.2%/-54.3 index points to close at 26,391. Volume perked up slightly 6% day over day though was well off the 1-year average while breadth tilted negative with 21 advancers and 28 advancers. Index heavyweights weighed on the index as HSBC -0.77%/-20 index points, Tencent -0.6%/-15.5 index points and China Construction Bank -0.48%/-9.8 index points. China Overseas Land & Investment was the best performer +2.23%/+7.1 index points though AAC Tech +2.22%/+2.4 index points. Pork company WH Group was the worst performer -2.21%/-4.7 index points. The 207 Hong Kong-listed stocks within the MSCI China All Shares Index were up +0.38% as utilities had a very strong day +1.39%, tech +0.84%, discretionary +0.73%, healthcare +0.39%, real estate +0.22%, and industrials +0.19%. Energy was off -0.42%, communication -0.39%, materials -0.22%, financials -0.06% and staples -0.05%. Southbound Connect volumes were light, though Mainland investors were buying the dip again. Volume leader CCB saw another outsized buying day of more than 10 to 1 buying to selling while Tencent and Ping An both experienced selling of 2 to 1 and 4 to 1. Southbound Connect accounted for 6% of Hong Kong’s total volume.

A-Share Update

The Shanghai & Shenzhen also overcame morning losses to close up +0.31% and +0.55% as volumes were up slightly day over day though well off the 1-year average. Breadth was positive with 2,477 advancers and 1,051 decliners as large, mid and small caps traded in line with one another. The 501 mainland stocks within the MSCI China All Shares Index gained +0.09% as discretionary +0.79%, tech +0.71%, financials +0.31%, real estate +0.19% and industrials +0.1%. Staples were off -0.7%, healthcare -0.22%, communication -0.2%, materials -0.12%, utilities -0.1% and energy -0.05%. Northbound Stock Connect volumes were light though foreign investors were active buyers with Shenzhen volume and buying exceeding Shenzhen’s. Foreign investors bought $489mm of mainland equities today on top of yesterday’s $385mm. Northbound Connect accounted for just under of 7% of the mainland’s total volume.

Last Night’s Prices & Yields

• CNY/USD 7.06 versus 7.04 yesterday
• CNY/EUR 7.82 versus 7.80 yesterday
• Yield on 1-Day Government Bond 1.82% versus 1.77% yesterday
• Yield on 10-Year Government Bond 3.17% versus 3.21% yesterday
• Yield on 10-Year China Development Bank Bond 3.60% versus 3.61% yesterday
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper -0.28%