Daily Posts

Mainland China Outperformed The S&P 500 in 2019, Netease and To List In Hong Kong

Key News

“I will be signing our very large and comprehensive Phase One Trade Deal with China on January 15.” – President Trump. Even more importantly “At a later date I will be going to Beijing where talks will begin on Phase Two!”. One great sell-side report I read notes that active EM mutual funds are heavily underweight China. The above Tweet is a green light for these investors to come back into Chinese stocks both on the Mainland and in the US and Hong Kong.

It is worth noting that Mainland China outperformed the S&P 500 last year. Oops….. The financial media is going to have to change its tune on China as its biggest clients start allocating. The big fund families won’t like having China bears being highlighted with their advertising dollars. Besides allocating to China, last month Vanguard announced a partnership with Ant Financial. Additionally, BlackRock, China Construction Bank and Singapore’s sovereign wealth fund Temasek announced an agreement. The aggregate marketing dollars (i.e. power) behind those three firms? Significant would be an understatement.

The PBOC cut banks’ reserve requirement ratio (RRR) by 50 basis points. What’s the RRR? It is the percentage of deposits banks need to hold on their books. By lowering the RRR by 0.5% for large banks to 12.5% and small banks to 10.5%, it frees up RMB 800 billion in a form of stimulus specifically for smaller private companies that have historically struggled to access credit. The benefit for banks was recognized by the market leading to a significant pop for mainland and Hong Kong shares. The move also provides liquidity within the banking system leading up to Chinese New Year.

December PMIs from both the National Bureau of Statistics and IHS Markit Caixin were resilient in December. Manufacturing was surprisingly strong while Services were off slightly. The strength is a great sign that stimulus is working. The big surprise for 2020 could be China coming out of a recent economic trough.

Tencent (700 HK) & Tencent Music Entertainment (TME US) purchased a 10% stake of Universal Music for $3.4 billion. Tencent is looking to bolster its offerings to retain more “eyeballs” as it faces a competitor in Bytedance’s TikTok.

Sina (SINA US) announced a $500mm buyback on New Year’s Eve which according to Bloomberg 19% of the company’s market value. This follows a disappointing 2019 for SINA which fell -19%.

The Hong Kong Exchange announced that it is in discussions with both NetEase (NTES US) and (TCOM, formerly to list in Hong Kong following Alibaba’s $13 billion secondary offering. Why list another offering in Hong Kong? The firms likely believe their stocks are undervalued as US investors treat them as trade war proxies instead of being geared to China’s consumer. I would expect secondary offerings such as Alibaba’s Hong Kong listing will be added to Southbound Connect at some point, which would be a major stimulus for the stock. However, the move may also be a way to hedge the US-China trade war, which is worrisome.

Overnight News

Overnight saw an ugly session as US Iran news sent equity markets tumbling. Japan, Taiwan, Korea, Thailand and Indonesia were off more than 1% while Malaysia and Singapore off less than 1%. Australia managed a very small gain while Hong Kong and Mainland China “outperformed” posting modest losses. Both Shanghai and Shenzhen are above the 3,000 and 1,700 levels as foreign investors are becoming increasingly active in Chinese equities.

H-Share Update

The Hang Seng was off -0.79%/-225 index points to close at 28,226 on moderate volumes just above the one year average. Breadth was off with only 7 advancers and 42 decliners led lower by Tencent -1.46%/-44 index points and insurance giant AIA -1.06%/-29.7 index points while energy giant CNOOC jumped +3.63%/+26.8 index points. PetroChina managed to edge out CNOOC as the day’s best performer +3.96%/+10.6 index points while CSPC Pharma slumped -4.54% with Apple suppliers Sunny Optical and AAC on its heels off -3.85% and -3.45%. China domiciled stocks underperformed slightly with the Hang Seng Enterprises off -0.8% versus HK domiciled companies off -0.67% represented by the Hang Seng HK 35. This is more by sector composition than anything as tech was a wreck as breadth was well off on both indices. The HK listed stocks within the MSCI China All Shares were off -0.91% as energy and utilities managed gains of +2.5% and +0.14%. Healthcare was off -2.96%, real estate -1.94%, industrials -1.56%, tech -1.41%, communication -1.16%, staples -0.88%, financials -0.8%, materials -0.74% and discretionary -0.11%. Southbound Connect volumes were elevated with mainland investors buyers of HK stocks though volume leader CCB had slight selling pressure. Mainland investors bought $242 million of HK stocks today with Southbound turnover accounting for just over 9% of HK turnover.

A-Share Update

The Shanghai & Shenzhen eased in the afternoon to give up gains to close -0.01% and +0.44% on strong volume which increased +15.5% from Friday and well above the 1-year average. Mid and small caps outperformed ending the day in the green while large caps ended the day down on the day. The mainland stocks within the MSCI China All Shares were off -0.25% with energy outperforming +2.14%, communication +1.13%, tech +0.68% and materials +0.48%. Real estate was off -1.53%, utilities -1.32%, healthcare -0.66%, discretionary -0.52%, financials -0.622%, industrials -0.4% and staples -0.22%. Northbound Connect volumes were very strong with foreign investors active buyers of mainland stocks. The Shenzhen had stronger volume and buying than the Shenzhen as this trend from 2019 continues in 2020. Foreign investors bought $624mm of mainland stocks today which is a strong start to the week. Last week foreign investors bought $2.549 billion of mainland stocks. Foreign investors accounted for only 4% of mainland turnover.

Last Night’s Prices & Yields

  • USD/CNY 6.9767 versus 7.0075 on Tuesday, December 24th
  • EUR/CNY 7.8037 versus 7.78 on Friday
  • Yield on 1-Day Government Bond 1.3% versus 1.3% on Friday
  • Yield on 10-Year Government Bond 3.14% versus 3.14% on Friday
  • Yield on 10-Year China Development Bank Bond 3.57% versus 3.59%
  • Commodities were higher on the Shanghai & Dalian Exchanges with Dr. Copper -0.10%