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Key News

Asian equity markets were a sea of red with every market down around concerns that the coronavirus may be going global. It is surprising to me how many countries didn’t follow the US and China in limiting air travel over the last several weeks. Unfortunately, the consequence is that we could see a significant lock down in airline travel globally, hurting the tourism industry. Efforts to contain the spread of the virus are ramping up though, especially in emerging market countries.

Thailand was hit hard, falling 5%, while Australia was off 2% and Singapore and India 1%. Japan and HK were down a little less than 1%. The mainland market had an interesting day as growth/tech stocks, mainly mid and small caps, were dumped by retail investors who locked in profits and appeared to rotate into large and mega caps. This had foreign investors locking in gains as well which didn’t help.

Stimulus measures are supportive of “Old China” sectors and the underlying stocks. As people go back to the factory or auto plant, there is a downstream effect for the inputs and energy consumption. Property and infrastructure had a strong day as evidence. Then, should I dump New China for Old China because of one day’s price action? Of course not. Ultimately China’s economy is increasingly driven by the “New China” such as growth/tech stocks, and this trend is apt to continue. In order to offset the effect of the coronavirus on China’s economy, policy makers are pushing on the stimulus gas pedal. This will benefit both New and Old China.

HK announced a HK $120B stimulus measure that includes giving residents just over a $1,000. HK is in bad shape economically.

Coronavirus Update: There are 81,191 confirmed cases globally of which 78,064 are in China. Within China, 65,187 are in Hubei province, and 2,615 deaths occurred in Hubei of the 2,768 deaths globally. There were 9 new cases outside of Hubei province and 401 within Hubei province, down from 499 yesterday.

China High Frequency Economic Data: China data continues to improve with nearly 70% of migrant labors back to work. We get an annual slump in China economic data every Chinese New Year’s with people off for the holiday, so these numbers are 100% where we should be after Chinese New Year’s. This year we’ve seen that slump extend due to the coronavirus, but things are up picking back up. Our colleagues at CICC have done an outstanding job in providing us this data. I receive a lot of research from many boutique, global and mainland firms, but CICC's work is standing out from the crowd. (My employer is owned by CICC in full disclosure. Though I wouldn’t say this if I didn’t mean it.) According to CICC's data, freight logistics capacity utilization is up to 60% from where it should be post Chinese New Year’s. Transportation metrics are still well off though while property sales is coming off a very low base. Coal, steel, oil and rebar dipped day over day.

China Stimulus: Overnight, the State Council announced RMB 500 billion of loans for small businesses. The Ministry of Transportation announced that nearly 40% of “key” construction projects were being worked on. I would expect this number to improve significantly in the next week or so. For Hubei province, there were a number specific stimulus measures announced such as a VAT cut.

Weibo (WB US) reported pre-market. Will provide more color as I need to dive into the release.

• Revenue $468.1mm versus estimate $468.9mm
• Adjusted EPS $0.77 versus estimate $0.72
• Q1 2020 forecast down 15% to 20%

Sina (SINA US) reported pre-market. Will provide more color as I need to dive the release.

• Revenue $593mm versus estimate $550mm
• Adjusted EPS $1.17 versus estimate $0.70
• No Q1 nor 2020 forecast due to coronavirus

H-Share Update

The Hang Seng Index opened at a low of -1.54% but managed to come back to -0.73%/-196 index points to close at 26,696. Volume was up slightly day over day though well above the 1 year average. Breadth was awful with just 8 advancers and 37 decliners. Index heavyweights were a sea of red with China Mobile -2.32%/-27.2 index points, HSBC -0.8%/-20.1 index points and Tencent -0.5%/-15.8 index points. Real estate company, Country Garden, was the best performer +0.96%/+2.3 index points while Apple suppliers Sunny Optical and AAC were the worst performer’s -3.68%/-10.1 index points and -2.81%/-3.1 index points. There were plenty of stocks vying for the worst performer with Macau casinos, energy and even healthcare off.

HK companies and Chinese companies were off -0.64% and -0.74% using the HS China Enterprises and HS HK 35 indices as proxies. The broad Hang Seng Composite was off -0.73% which was inline with the Chinese companies listed in HK within the MSCI China All Shares. Real estate and materials were the only positive sectors gaining 0.98% and 0.76%. To the down side: tech was a wreck at -3.04%, surprisingly healthcare was down -1.81%, utilities -1.34%, staples -1.31%, energy -1.18%, energy -1.14%, communication -0.77%, financials -0.6% and industrials -0.11%.

Southbound Connect volumes were elevated though off a touch from the last week. Mainland investors were buyers of HK stocks (again) with volume leader CCB seeing 9 to 1 buys, Semiconductor Manufacturing had buyers just outpace sellers, and Tencent had 3 to 1 buyers. Mainland investors bought $480mm of HK stocks while Southbound Connect volume accounted for just over 7% of HK turnover.

A-Share Update

The Shanghai & Shenzhen’s off day turned nasty into the close as they slumped -0.83% and -2.71%. Shanghai was up +0.52% at one point though the Shenzhen opened lower and stayed that way most of the day. Volumes were off -7% from yesterday’s record breaking volume while breadth was quite as bad with 1,376 advancers and 2,351 decliners.

Small and mid caps were smashed between 3.5% and 5% as retail investors booked profits in tech stocks. Mega caps were off ~-0.25% while large caps off ~-0.5%. The mainland stocks within the MSCI China All Shares were off -1.59% with real estate +2.68% and energy +0.36%. Tech was crushed -5.96%, health care -3.12%, communication -1.92%, discretionary -1.44%, materials -0.93%, staples -0.65%, financials -0.6%, industrials -0.23% and utilities off -0.21%.

Foreign investors were sellers of mainland stocks for the fourth trading day in a row via the Northbound Connect platform. Interesting that Shanghai Connect had elevated volume though sellers barely outpaced buyers. Shenzhen Connect was sold more aggressively than SH on very high volumes as foreign investors scrambled to get out of the way of the retail rotation. Foreign investors sold $958mm of mainland stocks while foreign trading accounted for just over 4% of mainland turnover.

Last Night’s Prices & Yields

• CNY/USD 7.02 versus 7.02
• CNY/EUR 7.63 versus 7.61
• Yield on 1-Day Government Bond 1.18% versus 1.28%
• Yield on 10-Year Government Bond 2.84% versus 2.85%
• Yield on 10-Year China Development Bank Bond 3.33% versus 3.33%
• Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper off -0.44%