Daily Posts

The Power of Passive: Stocks to Watch During Today’s Index Rebalance

Key News

Asian equities were predominantly positive led by Hong Kong, Korea, India, Singapore, Malaysia, Indonesia, and the Philippines. However, Japan, Mainland China, Taiwan, Australia, and Thailand were off. The biggest story today was volume! Volumes surged due to the FTSE Russell and S&P rebalances. The same phenomenon will occur today in the US, exacerbated by Quad Witching. No broomsticks are involved as options and futures on both stocks and indexes expire today.

Watch BABA at today’s close as the power of passive will be on full display. The power of passive refers to all the money invested in ETFs and index funds, which make rebalance days such as today very important. For stocks that see index changes, passive managers have to buy/sell at the market close. Alibaba’s market cap has grown due to Altaba (AABA US) selling its BABA shares and the recent Hong Kong listing. The world’s largest Emerging Market ETF is benchmarked to the FTSE Russell Index, which means it will have to buy BABA shares at the close. I don’t know if BABA will go up or down, but volume will be massive. BABA’s Hong Kong listing (9988 HK) gained 1% today.

iQIYI (IQ US) is another name to watch due to an index increase. The other big news today for Hong Kong was Link REIT (823 HK) being upgraded by a broker after buying an office building in Sydney. Real estate stocks rose on the news, but the purchase is hardly a confidence booster for Hong Kong. There was chatter that Mainland property rules will be loosened, which helped fuel the real estate outperformance in Hong Kong and Mainland China.

Apple supplier Sunny Optical (2382 HK) was off nearly 4% leading to broad tech weakness in Hong Kong and the Mainland. There was no news on the selloff, but it was likely due to year-end profit-taking as the stock is up +99% YTD and just off its 52-week highs. Tech has outperformed recently as several brokers cited profit-taking in the sector. Maybe investors need some cash for gift buying?

Mainland stocks were off as the 1-year Loan Prime Rate was unchanged at 4.15% which slightly missed expectations for a 5bps cut. The lack of change wasn’t a big deal as brokers reaffirmed their view that the PBOC will keep monetary conditions loose going into year-end and through 2020.

Hopes for a Trump-Xi summit were dashed as President Xi will not attend the World Economic Forum in Davos. Regardless, Phase One appears set to be signed in early January.  

Nike (NKE US) reported revenues after the US close yesterday. While North America revenues grew 5% in the quarter, Greater China revenues grew by 20%. Earnings before interest and taxes for North America were -1% while Greater China +24% (Europe/Middle East/Africa +13%, Asia Pac & Latin America +17%).

For many today will be the last day of work in 2019. I wish you and your family a happy holiday season! May 2020 and the coming decade be prosperous and fulfilling both personally and professionally! China Last Night will be published next Monday and Tuesday before taking some time off to spend with family. We will pick things up post-New Year’s.

H-Share Update

The Hang Seng chopped around to a +0.25%/+70.8 index point gain to close at 27,871. Turnover surged 17.8% day over day above the 1-year average as 34 stocks advanced and 14 declined. China Mobile gained +2.4%/+28.5 index points followed by Link REIT +2.79%/+14.3 index points though Sunny Optical was the worst performer off -3.68%/-11 index points. The day’s best performer was China Unicom +3.57%/+4.7 index points. Chinese companies slightly outperformed Hong Kong domiciled companies as the Hang Seng (HS) Enterprises Index +0.4% while the HS HK 35 +0.36%. The Hong Kong listed stocks within the MSCI China All Shares Index +0.08% led by real estate +1.24%, utilities +0.74%, staples +0.47%, energy +0.36%, communication +0.29% and financials +0.006%. Tech was off -1.6%, discretionary -0.65%, industrials -0.54%, materials -0.35% and healthcare -0.13%. Southbound Connect volumes were moderate/light with volume leader Tencent seeing 2 buyers for every 1.5 sellers, CCB buyers outpaced sellers by a small margin while Sunny Optical was sold nearly 3 to 1. Mainland investors accounted for only 5.5% of Hong Kong turnover today as they bought $153mm of Hong Kong stocks.

A-Share Update

The Shanghai & Shenzhen slumped into the close off -0.4% and -0.74% with volume off -1% day over day though still above the 1-year average. Breadth needed to call for emergency assistance with 911 advancers and 2,715 decliners. Large-cap and mid-caps “outperformed” to the downsize as small caps slumped 1%. The Mainland stocks within the MSCI China All Shares Index were off -0.35% with real estate +1.12%, discretionary +0.13% and financials +0.06%. Tech was off -1.58%, energy -0.85%, healthcare -0.8%, materials -0.6%, industrials -0.52%, utilities -0.39%, communications -0.31% and staples -0.18%. Foreign investors were active buyers of Mainland stocks in moderate volumes. Shenzhen Connect volumes exceeded Shanghai’s though the latter experienced stronger buying than the former. Foreign investors bought $530mm of mainland stocks today. That brings the weekly total to $3B for the week.

Last Night’s Prices & Yields

  • CNY/USD 7.01 versus 7.01 yesterday
  • CNY/EUR 7.77 versus 7.79 yesterday
  • Yield on 1-Day Government Bond 2.03% versus 2.07% yesterday
  • Yield on 10-Year Government Bond 3.18% versus 3.21% yesterday
  • Yield on 10-Year China Development Bank Bond 3.62% versus 3.59%
  • Commodities were higher on the Shanghai & Dalian Exchanges with Dr. Copper +0.39%