Daily Posts

Headlines Look Backward While Markets Are Forward-Looking

Key News

Asian markets diverged with Japan, Hong Kong, Mainland China, and Korea rising while Taiwan , Australia, India, Singapore, Malaysia, Thailand and Indonesia were off. The big story was Mainland China, which ripped higher as Mainland investors believe this weekend’s poor PMIs will lead to further stimulus measures. Investors in China are aware that the country is returning to work in a significant way despite the US financial media’s worry over supply chains.

Another factor is the disparity between Mainland China’s dividend yield versus China’s 10 Year Treasury. Asset classes compete with one another for investors’ capital. We can create a ratio that divides the bond yield by stock yield to measure the attractiveness of stocks versus bonds. On Friday, the ratio hit the second highest level since 2006. The highest level ever was reached during the panic at the end of December 2017/early January 2018. The market timing effectiveness of the ratio is debatable but noteworthy.

High frequency economic data continues to indicate that China is returning to work as indicators are inching back toward normal levels recorded before the Lunar New Year holiday. Coal is at 60% of pre-Lunar New Year levels, freight is at 73%, property sales are still off but starting to uptick and migrant labor is at 85%. Commodities were slammed on Friday which stagnated their recovery. Transportation continues to lag.

There have been 89,197 cases of Coronavirus cases while 45,175 people have recovered. Of the 89k global, 80,026 cases are in China of which 67,103 are in Hubei province. There are now more recovered cases in Hubei than current cases. There were three new cases reported outside of Hubei province while new cases within Hubei fell to 196. Cases outside of China did pick up to 9.2k cases from 8.5k. The US media has lost all credibility in my mind. They are deliberately scaring people in order to pad their own profits. The two very unfortunate deaths, one in his 50s and the 70s, in Washington state both occurred in people who had “underlying health conditions”. What did they have? It is absurd that we don’t know! The first case in NYC is a woman who had just returned from Iran. The bigger story in my mind is that Americans are allowed to visit Iran! I had no idea it was allowed. Flights to infected areas should be stopped which hasn’t fully taken place. Travel and tourism-related sectors should be avoided as we saw in China.

We have long warned about Hong Kong domiciled companies as the local economy suffers from protests and now from the coronavirus. There was a sharp divergence between Hong Kong and Chinese companies that trade in Hong Kong today with China-domiciled companies coming out on top. Investors may want to limit their exposure to companies within the MSCI Hong Kong Index. China’s economy will benefit from stimulus measures though it is hard to find a catalyst for Hong Kong. (JD US) reported Q4 earnings before the US market open which exceeded expectations. Most impressive was the company’s strong guidance in Q1.

H-Share Update

The Hang Seng Index opened down -0.2% but quickly rebounded closing +0.62%/+161 index points to close at 26,291. Breadth was positive with 30 advancers and 19 decliners while turnover fell -25% from Friday’s MSCI rebalance trading and steep decline. Index heavyweights China Construction Bank +2.22%/+46.8 index points, Tencent +0.93%/+28.9 index points and energy giant CNOOC +4.31%/+25.9 index points. Today’s best performer was textile maker Shenzhou International +5.59%/+14.1 with Sunny Optical +5.12%/+14 index points. Hong Kong subway operator MTR Corp was off -1.82%/-3.6 index points. China-domiciled companies listed in Hong Kong gained +1.77% while Hong Kong-domiciled companies listed lost -0.35% using the HS China Enterprise and HS HK 35 indices as proxies. No that isn’t a typo! The Chinese companies listed in Hong Kong within the MSCI China All Shares Index gained +1.94% led materials +4.75%, energy +3.54%, real estate +3.21%, tech +3.21%, industrials +2.93%, discretionary +2.44%, staples +1.9%, financials +1.68%, health care +1.15%, communication +1.09% and utilities +0.89%. Southbound Connect trading was elevated with Mainland investors buyers of Hong Kong stocks. Volume leader CCB had 10 to 1 buyers, real estate developer Sunac had sellers outpace buyers by a small margin and Tencent had buyers outpace sellers by a small margin. Mainland investors bought $424mm of Hong Kong stocks today while Southbound Connect turnover accounted for nearly 9% of Hong Kong turnover.

A-Share Update

The Shanghai & Shenzhen followed Friday’s plunge with a massive rally today +3.15% and +3.77%. Even more impressive was the breadth with an amazing 3,646 advancers and only 129 decliners. Volume was off -8% from Friday but not quite 2X the 1-year average. Large, mid and small caps were up equally. The Mainland Chinese stocks within the MSCI China All Shares Index gained +3.68% led higher by industrials +5.44%, materials +5.18%, real estate +5.14%, tech +3.79%, energy +3.49%, discretionary +3.23%, financials +3.14%, staples +3.12%, health care +2.58%, communication +2.47% and utilities +2.36%. Foreign investors turned 180 degrees, buying Mainland stocks on very high volumes as volumes on Shenzhen exceeded Shanghai volumes. Shanghai Connect volume leader Kweichow Moutai had buyers barely outpace sellers while Ping An Insurance had sellers outpace buyers by a small amount. Anhui Conch Cement had buyers outpace sellers by a small margin. Shenzhen Connect volume leader BOE Technology had buyers outpace sellers.

We mentioned late last week that Luckin Coffee was being added to MSCI indices including EM and China indices. This required passive managers to buy the stock at Friday’s close. I didn’t predict whether the stock would go up or down but only that volume would increase. Volume on Friday was 19mm shares versus 15mm on Thursday though the 1-year average is just 8.2mm shares. More significant was the reality that of LK’s 19mm of volume, 6.6mm was of it consisted in trade at the market’s close. The power of passive was on full display!

Last Week’s Prices & Yields

  • CNY/USD 6.96 versus 6.99
  • EUR/CNY 7.74 versus 7.67
  • Yield on 1-Day Government Bond 1.25% versus 1.25%
  • Yield on 10-Year Government Bond 2.74% versus 2.74%               
  • Yield on 10-Year China Development Bank Bond 3.20% versus 3.19%
  • Commodities rebounded on the Shanghai & Dalian Exchanges with Dr. Copper were off +0.45%