Foreign Investors Buy The Mainland Dip
Asian equities followed the US’ Friday move lower though the Hang Seng managed a small gain due to the performance of the index’s largest weights. India managed a small gain after a plunge during a special trading session on Saturday following the release of Modi’s budget. Mainland Chinese markets opened for the first time since closing on Thursday January 23rd for Chinese New Year’s. The drop was in-line with expectations. However, we may see another dip tomorrow due to the large number of stocks hitting limit down. In China, once a stock is down -10% you can’t sell it further, which is similar to circuit breakers in the US. Northbound Connect volumes were MASSIVE with foreign investors buying $2.592 billion of Mainland stocks.
Where do markets go from here? The Mainland markets could be off tomorrow. However, markets are beginning to discern winners from losers. Healthcare, online gaming, internet content, and online education stocks are the clear winners. This is evidenced by performance in Hong Kong overnight. Tourism and transportation will be negatively affected. The Mainland needs to regain its footing. However, I believe “New China” economic sectors are much better positioned versus “Old China” economic sectors. Unfortunately, Hong Kong sentiment is apt only to worsen as the tourist-starved city enters deep freeze.
Economic fallout from coronavirus? Economists and brokers are scrambling to figure this out. According to one Mainland broker, in 2019 epicenter Hubei accounted for 4.6% of GDP and 1.3% of exports. The outbreak is very much concentrated in Hubei. Authorities are taking no chances nationally as the “Affected Area” encompasses a healthy percentage of GDP. 2020 GDP and retail sales estimates will be lowered though it does depend on the extent to which the outbreak can be contained and brought back to normal.
Coronavirus – By far the best resource I’ve found is John Hopkins CSSE blog. There are 17,485 cases with 17,302 occurring in China with the vast majority occurring in Hubei providence. There have been 362 deaths of which 350 occurred in Hubei with only 1 death occurring outside of China in the Philippines. The rate of confirmed cases in China has slowed in a promising sign. Equity markets stabilized once the number of cases peaked back in 2002/2003. The flu has killed thousands of Americans though it barely raises an eyebrow here. Like coronavirus, the flu hits the elderly and young due to their weakening and developing immune systems. Additionally, I believe that China’s high rate of smoking likely makes a respiratory illness such as coronavirus especially deadly. Unfortunately, the media still doesn’t interview doctors about the coronavirus as profits prevail over commons sense. It is worth noting the removal Zero Hedge on Twitter for false coronavirus. Meanwhile, the Huffington Post publicly condemned a US Senator for his false coronavirus statements.
The 10-day built 1,000 bed hospital is up and running staffed by 1,400 medical personnel in Wuhan.
The Hang Seng traded in a narrow range off -0.63% before rallying back to a high of +0.76% to close +0.17%/+44.3 index points at 26,356 as volume surged 32% from Friday. Breadth was off with 18 advancers and 30 decliners though index heavyweights held up well with Tencent +1.88%/+56.8 index points, AIA +0.96%/+25.3 and China Construction Bank +1.01%/+19.8 index points. CSPC Pharma was the day’s best performer +3.7%/+9.3 index points while PetroChina sank -2%/-4.3 index points. Chinese companies outperformed Hong Kong stocks overnight +0.27% versus -0.32% using the HS China Enterprises and HS HK 35 Indexes as proxies. The Chinese companies listed in Hong Kong within the MSCI China All Shares +0.57% led higher by tech +1.99%, communication +1.39%, healthcare +1.38%, staples +1.31%, real estate +0.63% and financials +0.14%. Energy was the worst sector -1.36%, discretionary -0.58%, materials -0.38%, utilities -0.21% and industrials -0.03%. Southbound Connect reopened in the highest volume day I can recall. Trading was mixed between buyers and sellers though volume leader Tencent had nearly 3 to 1 buys, Xiaomi 2 to 1 buyers and China Construction Bank 10 to 1 buyers. Mainland investors bought $66mm of Hong Kong stocks today.
Shanghai & Shenzhen traded down -7.72% and -8.41% on terrible breadth of only 156 advancers and 3,617 decliners as volume sank -36% as the indices sliced through previous levels of support. There was no place to hide as Mainland investors returned from vacation and hit the sell button. The Mainland stocks within the MSCI China All Shares Index declined -8.86% led lower by real estate -10.47%, tech -10.36%, discretionary -10.09%, communication -9.94%, materials -9.84%, industrials -9.2%, energy -8.8%, financials -8.79%, staples -8.18%, utilities -5.93% and healthcare -5.39%. Northbound Connect had a massive day as foreign investors bought the Mainland stocks in size. This was one of the biggest days ever for Northbound Connect as volume and buying via Shanghai Connect exceeded Shenzhen Connect. Foreign investors bought a total of $2.592 billion of Mainland stocks today.
After NYC’s Friday close, Baidu (BIDU US) released a press release saying that Q4 and 2019 fiscal results would be released on February 27th. The company raised guidance for the Q4 revenue results range to $4.06B to $4.15B, implying a gain of 4% to 6% from a -1% to 6%. Net income guidance was also better than expected.
January Caixin China PMI Manufacturing: 51.1 versus estimate 51 and December’s 51.5
Takeaway: Another speed bump that was ignored in trading today despite the above expectation release.
Last Night’s Prices & Yields
Yields on 10-year government bonds decreased amid a flight to safety as the Yuan depreciated somewhat.
- Yield on 1-Day Government Bond 1.70% versus 1.43% on 1/23
- Yield on 10-Year Government Bond 2.82% versus 2.99% on 1/23
- Yield on 10-Year China Development Bank Bond 3.23% versus 3.43% on 1/23
- CNY/USD 7.02 versus 6.94 on 1/23
- CNY/EUR 7.76 versus 7.66 on 1/23