Key News

Asian equities rebounded as President Trump’s announcement of a payroll tax cut and other stimulus propelled bargain hunters. India was closed today for the Holi holiday. President Xi visited Wuhan today to demonstrate how China has beaten COVID-19. The worry is no longer China though we can learn from how China beat it.

The WSJ had an article saying that 89% of Italy’s fatalities have been over the age of 70. The elderly should self-quarantine themselves and avoid public places. The South China Morning Post had an article stating Chinese men accounted for 70% of fatalities according to one study. I have no medical training, but China’s smoking rate for men is 50% versus just 2% for women. Smokers should consider self-quarantine as well. Travel restrictions are increasing which is a good sign. Meanwhile, more corporations are telling their employees to work from home. Conferences should be restricted as shaking hands is clearly one way the virus can spread. I am worried that while white-collar professionals can work from home, blue-collar workers may not have the luxury. Unfortunately, I don’t have a solution. However, hopefully, the wealth disparity doesn’t create a health disparity.

As the US market has declined steeply as we saw in China in January, it is important to remember that the market there quickly rebounded and disparities between winners and losers emerged. Travel and tourism-related names are apt to face continued headwinds as business travel is curtailed. Meanwhile, low energy prices are apt to weigh on the high yield market. Growth/tech stocks are apt to weather the slowdown as working from home requires laptops and more servers. We saw this in China and can learn from it. 

Hubei province reported only 17 new cases while outside of Hubei there were only 4 new cases.

According to high-frequency economic data from CICC, coal consumption was unchanged at 72% of normal levels. Meanwhile, migrant workers have completely returned to their cities of employment. Freight logistics utilization dipped slightly to 80.6% though the trajectory is rising. Property sales continue to rise off a low base while transportation statistics have lagged.

Mainland investors have been buying Chinese financial companies listed in Hong Kong due to their high dividend yields. For instance, ICBC’s Hong Kong listing yields 5.32% with a P/E of 5.56 while China Construction Bank’s Hong Kong listing yields 5.42% with a P/E of 5.49. Chinese 10 Year Treasury yields are 2.71% in comparison. Asset classes compete with one another, thereby driving investor behavior. Taking Chinese A shares’ dividend yield and dividing it by the Chinese 10-Year Treasury Yield shows the relative value of stocks versus bonds. Applying this to the US, we may consider rebalancing our portfolio by selling bonds and buying stocks! In China, this ratio is at its highest level since 2006. It doesn’t mean Mainland stocks will rise though it does suggest that equities are attractive.

The South China Morning Post had a good article on shipping rates. The Baltic Dry Index, a shipping market bellwether, has risen 50% off a very low base after falling -83% from its September high according to my calculations using Bloomberg. Charter rates for oil tankers have risen in the last month to $28,816 from $12,500 a month ago though remain well off the $72,641 in January and $300,000 in September according to the article. Commodity carrying ships, called dry bulk carriers, are seeing their prices rise as Chinese factories ramp up production and demand more commodities. Container ships have seen a lower rebounded as finished goods take time to be built though one can speculate this lag effect will close in the coming months. Non-food CPI increased only +0.9%. Hopefully, US shipments of pork to China pick up as it represents a strong opportunity.

February CPI & PPI

PPI	-0.4% versus estimate -0.3% and January’s +0.1%
CPI	5.2% versus estimate 5.2% and January’s 5.4%

Takeaway: The market largely ignored the data release as PPI was expected to fall through with China coming back online this figure should rebound in March. CPI was driven by food prices rising 21.9% year over year due to the continued shortage of pigs leading very high pork prices which rose by 120%.

H-Share Update

The Hang Seng recovered from mid-morning loss of -0.25% rallying to close +1.41%/+352 index points though volumes were off -16% from yesterday though still well above the 1 year age. Breadth was strong today with 46 advancers and just 6 declines led higher by index heavyweights China Construction Bank +2.89%/+60 index points, ICBC +3.68%/+44 index points and Tencent +1.48%/+37 index points. Securities broker CITIC was the day’s best performer +4.98%/+9 index points though Apple supplier Sunny Optical recovered +4.9%/+13 index points. Sino Biopharma was off -1.36%/-4 index points despite a new drug approval while telecom companies China Unicom and China Mobile were off -1.36% and -1.11%. Chinese companies outperformed HK companies in HK today +1.69% versus +1.27% using the HS China Enterprises and HS HK 35 as proxies. The Chinese companies listed in HK within the MSCI China All Shares gained +1.45% led higher by discretionary +2.52%, energy +2.32%, financials +2.16%, tech +1.59%, real estate +1.28%, industrials +1.22%, communication +1.14%, staples +0.93%, materials +0.6% and utilities +0.52%. Health care stocks were off -0.49%. Southbound Connect volumes were elevated in the new normal as mainland investors continue to buy HK listed stocks at 2 to 1 buyers to sellers. Volume leader CCB had 17 to 1 buyers, Tencent 4 to 1 and Semiconductor Manufacturing was sold 2 to 1. Mainland investors bought $1.076 billion of HK stocks following a $1B day buy yesterday. Southbound Connect accounted for 8.6% of HK turnover today.

A-Share Update

Shanghai & Shenzhen gained +1.82% and +2.06%, respectively, overcoming morning losses as stocks rebounded in the afternoon session. Shanghai closed just below the 3k level at 2,996. Breadth was very strong with 2,887 advancers and just 785 decliners on volume that was flat day over day though twice the 1-year average. Small and mid-caps snapped back stronger than large caps though it was a broad rally. The Mainland stocks within the MSCI China All Shares Index gained +2.21% led higher by tech +5.16%, discretionary +2.85%, communication +2.71%, industrials +2.32%, staples +2.19%, financials +1.87%, materials +1.38%, utilities +1.23%, real estate +1.21% and health care +0.14%. Energy was off -0.13%. Foreign investors were active buyers of Mainland stocks via the Northbound Connect trading platform as Shenzhen volume and buying and exceeded its elder sibling Shanghai. Foreign investors bought $445mm worth of Mainland stocks today while Northbound Connect accounted for 4.4% of Mainland turnover.

Lost in yesterday’s disaster were strong Q4 results from small search provider Sogou (SOGO), which noted that search inquiries increased due to COVID-19. Revenues were still down due to Bytedance’s having taken a bite out of the company’s ad revenues. However, cost-cutting drove a strong uptick in net income. The company processed a daily average of 802mm voice searches during the quarter.

Last Night's Prices & Yields

• CNY/USD 6.96 versus 6.95 yesterday
• CNY/EUR 7.92 versus 7.93 yesterday
• Yield on 1-Day Government Bond 1.60% versus 1.19% yesterday
• Yield on 10-Year Government Bond 2.52% versus 2.61% yesterday              
• Yield on 10-Year China Development Bank Bond 3.11% versus 3.03% yesterday
• Commodities rebounded higher on the Shanghai & Dalian Exchanges with Dr. Copper were off -1.57%