Markets Cheer Tariff Rollback and Fall In New Coronavirus Cases
Besides being a great game, the highlight of the Super Bowl was the Hyundia Sonata Smaht Pahk commercial. After four great college years in the Commonwealth, I found the commercial hysterical. How to describe last night’s market action? Wicked Awesome! The mid-day announcement that China will cut tariffs on $75 billion of US imports on February 14th and an increasing conviction that the coronavirus epidemic is being contained led to strong animal spirits and a risk-on atmosphere.
Toyota reported strong earnings and raised its forecast, which was a big boost for stocks in Asia and only one among many positive catalysts for markets last night. The National Health Commission that two drugs have been found to effective in containing the spread of coronavirus. One media source dubbed the PBOC’s injections of liquidity into the Chinese financial markets a “policy bazooka” as further tax and fee cuts were announced to support smaller companies overnight.
Breadth in Hong Kong and Mainland China was exceptionally strong, as discussed below. One broker noted that Northern Asia vastly outperformed Southern Asia as global trade-oriented economies outperformed with Japan, Hong Kong, Mainland China, and Korea up over +2% while Taiwan was up over +1%. Outside of the Philippines, which gained over 2%, most of Southeast Asia was up between 0.5% and 1% including markets in Australia, India, Malaysia, Indonesia, and Thailand. Another broker noted the coronavirus “victim” stocks such as tourism, hotels, restaurants, casinos, and airlines all had a very strong day today considering the circumstances. Meanwhile, the coronavirus “beneficiaries” i.e. online gaming, healthcare, e-commerce, and online video also had a good day.
According to John Hopkins’ coronavirus dashboard, 28,088 of the 28,353 coronavirus cases are in China with 19,665 taking place in Hubei providence. There have been 565 deaths of which 549 were in Hubei providence. Our condolences and prayers to the families of all those affected. Fortunately, the rate of cases continues to fall in a promising trend.
Shanghai, Shenzhen and Hong Kong markets are all currently below pre-coronavirus levels but grinding higher. Sentiment in China and Hong Kong remains muted due to the drastic measures that have been taken to prevent the epidemic from spreading. The memories of SARS are not distant for those in Hong Kong, which was hit particularly hard by the epidemic. Markets are anticipating a continuation of the positive curtailment trend as well as a muted long-term economic impact. There appears to be some skepticism as indicated by the discounts on offer in US-listed mainland Chinese ETFs, which are off nearly 2%. I still believe markets were way overdue for a correction. However, few would have thought that an event as tragic as coronavirus would cause it. We have called the pullback a “gift” to long-term investors despite the likelihood of further volatility and I still stand by that statement.
I had the pleasure of speaking at a conference yesterday. The topic: the sector exposure effect of China and Emerging Market indices. In a nutshell, the consensus view is that Emerging Markets are out of favor. From March 9, 2009 to February 4, 2020 the S&P 500 returned 387% compared to the MSCI Emerging Market Index’s return of 123%. And yes, the US economy is doing great, corporate earnings are fantastic, buybacks are common, and there is a low interest rate environment. But why has EM lagged? I believe the reason is that nearly 50% of Emerging Markets is made up of value sectors such as financials, energy, industrials, and materials. And, it is very uncontroversial to say that value is very much out of favor. What’s a growth sector in EM? Tech, just like it is in developed markets. So, what’s EM tech up? 442%. If you owned the right sector, you beat both broad Emerging Markets and the S&P 500. The same is true of China, which appears not to have performed so well when looked at broadly. Strip out “Old China” and guess what? There is great performance to be had! Knowledge of index methodology is a significant part of our value-add at KraneShares ETFs and I am happy to share our insights with the investing public.
MSCI announced that its pro-forma for the March 2nd Quarterly Index Review will be released on February 12th. The rebalance will, therefore, be implemented by passive managers at the close on February 28th. The big questions will be whether Alibaba’s Hong Kong listing (9988 HK) is added and the extent of the increase in China tracking this time around. Remember that China outperformed broader EM in 2019 meaning that China’s percentage weight is due to increase. Already, China is 700 of the 1400 stocks in MSCI EM. My guess is that post-rebalance China will constitute 750 of 1400 EM stocks.
The Hang Seng rose +2.64%/+706 index points to close at 27,493 on volumes just down day over day though well above the 1-year average. Breadth was very strong with all 50 stocks advancing, led higher by the day’s best performer China Mobile +5.42%/+67.6 index points, Tencent +1.99%/+63.4 index points and AIA Group +2.21%/+59.7 index points. Apply supplier Sunny Optical was the “worst” performer +0.08% though it is worth noting that healthcare stocks CSPC Pharma and Sino Biopharma were up +1.04% and +1.26%. Hong Kong and China-domiciled companies traded inline gaining +2.58% and +2.57%, respectively, using the HS China Enterprises and HS HK 35 indexes as proxies. The HK 35 had all of its 35 names advance with no decliners while the China Enterprises had 45 advancers and 5 decliners. The broad Hang Seng Composite had 402 advancers and 55 decliners. It was a big up day! The Chinese companies within the MSCI China All Shares Index gained +2.05%, led higher by energy +4.14%, industrials +2.96%, real estate +2.66%, communication +2.51%, financials +2.51%, healthcare +2.28%, tech +1.9%, staples +1.9%, materials +1.77%, materials +1.07%, and utilities +0.94%. Southbound Connect, the trading platform allowing Mainland investors to trade Hong Kong-listed stocks, had strong volume from a historical perspective but well off recent highs. Volume leader Tencent had 2 to 1 buyers, CCB had 3 to 1, and Semiconductor Manufacturing has 2 to 1. Mainland investors bought $311mm worth of Hong Kong-listed stocks today while Southbound turnover accounted for almost 7% of Hong Kong trading.
The Shanghai & Shenzhen gained +1.72% and +2.9% on strong volume up day over day and well above the 1-year average, a move which technical analysts would love. Breadth was very strong with 3,400 advancers and 284 decliners as mid and small caps outperformed large caps. The Mainland stocks within the MSCI China All Shares Index gained +2.51% led higher by communication +5.91%, healthcare +3.39%, tech +3.29%, staples +2.94%, industrials +2.65%, discretionary +2.13%, financials +1.79%, materials +1.75%, energy +1.69%, Utilities +1.34% and real estate +1.26%. Northbound Connect, the trading platform for foreign investors looking to buy Mainland stocks, had very strong volumes today. Shenzhen Connect volume was greater than Shanghai Connect though buying was slightly stronger on SH versus SZ. Mid and small caps tend to be listed in Shenzhen, not Shanghai. Foreign investors bought $1.515 billion of Mainland stocks. Foreign investors’ trading accounted for nearly 5% of Mainland turnover.
Last Night’s Prices & Yields
- 1-Day Government Bond Yield 1.46% versus 1.49% yesterday
- 10-Year Government Bond Yield 2.84% versus 2.84% yesterday
- 10-Year China Development Bank Bond Yield 3.26% versus 3.27% yesterday
- CNY/USD 6.97 versus 6.97 yesterday
- CNY/EUR 7.65 versus 7.68 yesterday
- CNY/GBP 9.02 versus 9.06 yesterday
- Commodities were largely higher as they continue to rebound on the Shanghai & Dalian Exchanges with Dr. Copper +1.19%