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Key News

Japan should have hit the snooze bar as it reopened with a thud following yesterday’s market holiday for the Emperor’s birthday. Australia was also hit hard while India and Indonesia were off slightly. Hong Kong, Taiwan, Korea, Singapore and Malaysia managed small gains. Mainland exchanges diverged as Shanghai slipped while Shenzhen gained though the big story was the mainland’s highest turnover since 2015.

Concern for the continued spread of the coronavirus is one reason for the market’s selloff yesterday. In total, there are 80,289 cases, of which 77,660 are in mainland China and 64,786 are in Hubei Province. Of the 2,704 deaths, 2,563 are in Hubei Province. There were only 11 new cases outside of Hubei, but Hubei did see 499 new cases. Twenty four provinces saw no new coronavirus cases today. Outside of China, we have seen an uptick though hopefully resources are brought to bear to prevent the epidemic from going global.

“New China” sectors and their underlying stocks are outperforming “Old China” sectors and stocks. Why? “New China” sectors such as online food and restaurant delivery, gaming, online education, and e-commerce are being used heavily in the wake of the coronavirus as people stay at home. Mainland investors recognize this as Tencent (700 HK) and Alibaba (9988 HK) were up today. Foreign investors are not recognizing this as US-listed China equity ETFs have lost $359mm over the last week.

China's most recent economic data is beginning to be published, and coal, freight, factory utilization data, property sales and steel are all in an upswing. I believe the market has greatly under estimated the extent to which the Chinese market is coming back.

H-Share Update

The Hang Seng had a choppy morning session, reaching an intra-day low of -0.57% before rallying into the close. The Index closed +0.27%/+72.35 index points to close at 26,893 just below the 27k level. Breadth was mixed with 26 advancers and 20 decliners. Volume slipped 5% from yesterday, but it is still well above the 1 year average.

Index heavyweights were mixed with Tencent +2.87%/+91.8 index points, HSBC -0.8%/-20.1 index points and China Mobile -1.3%/-15.5 index points. Apple supplier, Sunny Optical, was the day’s best performer +4.14%/+11.9 index points while China Unicom and China Mobile were off -1.67%/-2 index points and -1.3%/-15.5 index points, respectively.

Hong Kong domiciled stocks outperformed Chinese domiciled stocks in HK at +0.11% and +0.16%, using the HS China Enterprises and HS HK 35 indicies as proxies. The Chinese companies listed in HK within the MSCI China All Shares gained +0.66% led higher by Tencent pulling communication services +2.09%, tech +1.98%, health care +1.57%, real estate +1.01%, consumer discretionary +0.87% and staples +0.01%. Utilities was off -1.78%, energy -1.23% materials -1.01%, industrials -0.74% and financials -0.2%.

Southbound Connect volume was elevated again with Mainland investors buying Hong Kong stocks. Tencent was the volume leader seeing 6 to 1 buying, China Construction Bank 10 to 1 (remember CCB is dividend play for mainland investors as the Hong Kong stock yield’s 5.46% versus a P/E of 5.48 and 10 Year Chinese Treasury 2.85%; US high yield is just over 5%) and Semiconductor Manufacturing had 5 to 3 buyers. Southbound Connect was just over 9% of Hong Kong turnover while mainland investors bought $505 million of Hong Kong stocks.

A-Share Update

Shanghai & Shenzhen were down -1.08% and -0.53%, respectively, in the morning session before staging an afternoon rally to close -0.6% and +0.51%, respectively. Volume picked up 5% from yesterday in the largest volume day in seven years. Breadth was off with 1,113 advancers and 2,642 decliners. Small cap and mid caps outperformed large caps which outperformed mega caps. The mainland stocks within the MSCI China All Shares Index gained +0.24%, led higher by tech +1.93%, healthcare +1.17%, consumer discretionary +0.83% and real estate +0.57%. Consumer staples was off -0.2%, financials -0.2%, industrials -0.2%, materials -1.11%, energy -1.34% and communication services -1.73%.

Northbound Connect volumes were elevated as foreign investors sold mainland stocks to the tune of $688mm. Shenzhen volume exceeded the Shanghai’s. More importantly, selling on Shenzhen was less pronounced than Shanghai’s. Foreign investors accounted for almost 4% of mainland turnover.

Last Night’s Prices & Yields

• CNY/USD 7.01 versus 7.03 yesterday
• CNY/EUR 7.60 versus 7.63 yesterday
• Yield on 1-Day Government Bond 1.28% versus 1.23% yesterday
• Yield on 10-Year Government Bond 2.82% versus 2.81% yesterday
• Yield on 10-Year China Development Bank Bond 3.24% versus 3.24% yesterday
• Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper off -0.02%