Key News

Asian equities were a sea of red with only Mainland China and Thailand in positive territory while Korea was hit hard as the number of coronavirus cases in the country reached 204. China bucked the trend as electric vehicle promotion accompanied by ample PBOC liquidity pushed stocks higher. Auto manufacturing requires a multitude of downstream beneficiaries. The PBOC cut both the loan prime rate (LPR) and the medium-term lending facilities (MLF) this week to help support businesses’ access to credit during the epidemic.

While Northbound Connect saw a net outflow today, for the week foreign investors were net buyers of Mainland stocks. What is driving this inflow? One broker commented today that several sovereign wealth funds have been active buyers of Mainland stocks. Another factor is likely emerging market managers being underweight to China throughout 2019. They are playing catch up to the benchmark’s 34% China weight.

We are beginning to see Mainland China come back online as coal consumption and property sales have started to rise off of the low level begun by the Lunar New Year and extended due to the coronavirus quarantine. Transportation continues to lag significantly as airline and train traffic is anemic.

SOEs are headed back to work while private companies are gradually reopening. Hubei province remains in lockdown for the time being. How important is this province? According to one broker it accounts for just over 5% of China’s agricultural output and less than 5% of manufacturing. We all know that Q1 data is going to poor as we saw during the SARs outbreak. The question is now whether the reminder of the year make up for the Q1 slump. The government is pushing for a big rebound. However, market participants appear uncertain it can be achieved. Ultimately, I believe the market was due for a correction anyway. We will have to wait to find out if policy support can offset the weak data we know is coming.

According to John Hopkins’ CSSE coronavirus blog, the number of confirmed cases is 76,775 with 75,467 in China, of which 62,662 are in Hubei providence.

H-Share Update

The Hang Seng ended the week with a thud off -1.09%/-300 index points to close at 27,308 on volumes off slightly day over day and just above the 1-year average. For the week the Hang Seng was off -2.07% in US $. Breadth was awful with only 1 stock advancing and 48 decliners led lower by Tencent -2.2%/-70.1 index points, China Construction Bank -1.37%/-29 index points, and AIA -0.69%/-18.2 index points. The Chinese companies within the MSCI China All Shares lost -1.3% led lower by Tencent. In sector moves, communications -1.97%, real estate -1.79%, tech -1.58%, health care -1.28%, industrials -1.06%, financials -1.02%, staples -0.75%, energy -0.68%, discretionary -0.57%, materials -0.33% and utilities -0.23%. Hong Kong domiciled companies slightly outperformed Mainland domiciled companies -1.08% and -1.13% using the HS HK 35 and HS China Enterprise indexes as proxies. For the week, Mainland domiciled companies outperformed Hong Kong stocks. Southbound Connect was a rare net sale of Hong Kong stocks by Mainland investors, albeit in a small amount ($5mm). Volume leader Tencent was sold not quite 3 to 1, China Construction Bank was bought 11 to 1 and real estate company Sunac saw buyers just outpace sellers. Southbound Connect accounted for just over 10% of Hong Kong’s turnover last night.

A-Share Update

The Shanghai & Shenzhen closed off their highs but managed to gain +0.31% and +1.12% to end the week +3.55% and +6.51% in US $. Volumes picked up nearly +10% accompanied by strong breadth with 2,301 advancers and 1,279 decliners. Large caps lagged mid and small caps due to growth sectors outperforming value sectors. The Mainland stocks within the MSCI China All Shares gained +0.13% led by tech +2.29%, communication +1.16%, health care +0.37%, discretionary +0.25%. Gold led materials +0.18% and industrials +0.03%. Real estate led to the downside -1.49%, staples -0.68%, financials -0.51%, energy -0.35% and utilities -0.32%. Northbound Connect flows were high as Shenzhen Connect had net inflows while Shanghai Connect had net selling by foreign investors. This is aligned with the growth versus value sector divergence today. Net selling caused outflow of $159mm though for the week foreign investors bought $929mm. Northbound Connect accounted for nearly 4% of Mainland volume.

Last Night’s Prices & Yields

• CNY/USD 7.02 versus 7.00 yesterday
• CNY/EUR 7.60 versus 7.55 yesterday
• CNY/GBP 9.04 versus 9.06 yesterday
• Yield on 1-Day Government Bond 1.27% versus 1.31% yesterday
• Yield on 10-Year Government Bond 2.89% versus 2.88% yesterday
• Yield on 10-Year China Development Bank Bond 3.29% versus 3.29% yesterday
• Commodities were higher on the Shanghai & Dalian Exchanges with Dr. Copper were off -0.41%