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Asia Waits for US Economic Policy

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Key News

Asian equities did not follow the US equity market higher as Asian investors were waiting for a clear articulation of US stimulus policies. All markets were down though India did rise, playing catch up following its market holiday. Korea was hit hard while Japan was also an underperformer. Our institutional brokers noted that their clients were using the bounce to “de-risk” their portfolios due to uncertainty regarding the outbreak’s economic impact on the US and Europe. How does one model GDP with so many unknowns? There is some chatter that Hong Kong could be close to bottom. Meanwhile, Mainland China saw quick profit taking in favored sectors. As we have previously stated President Xi has not cut his 2020 GDP target as policy support continues to be implemented.

COVID-19 Cases in China and even in Hubei have come to a standstill. A Mainland media source noted that Wuhan will soon be returning to work. Another media source noted that schools will reopen soon in several provinces.

According to high frequency economic data from CICC, coal consumption dipped slightly though freight logistics utilization increased to 82% of its pre-Chinese New Year level. Property sales continue to pick up while transportation volumes are slowly coming back though remain well off their pre-Chinese New Year levels. I still believe that March economic data may surprise to the upside.

What can we learn from China’s experience with COVID-19? A China-style quarantine is not feasible though corporations are implementing work from home policies and curtailing work travel. The elderly and those with pre-existing medical conditions have accounted for a disproportionate percentage of fatalities. This demographic should probably quarantine themselves.

From an investment perspective, the market selloff we experienced on Monday occurred in China in mid-January but was subdued in comparison. China markets rebounded on strong policy to contain COVID-19 and support the economy. Unfortunately, we’ve not seen that thus far as bipartisan bickering during an election year might be an impediment. The China market was eventually able to discern between winners and losers. “New China” economic sectors and stocks fared better than old economy sectors and stocks while travel and tourism fared poorly. Health care expectedly outperformed.

E-commerce company Pinduoduo (PDD) reported Q4 earnings before the US open today. The results look outstanding to me though revenue missed analyst expectations. The company continues to plow revenue into growing the company and put net income on the back burner. Market sentiment has soured on pure growth companies and is beginning to favor companies exhibiting fiscal discipline and a desire to become profitable. However, PDD likely gets a pass given how quickly they are growing, as you can see below.

  • Revenue grew 91% Year over Year to RMB 10.792B ($1.550B) from RMB 471B though analyst estimate was 11.2B
  • Gross Merchandise Value grew 113% to RMB 1.006 trillion ($144B)
  • Average monthly users +77% to 481mm
  • Active buyers +40% to 585mm
  • Operating loss declined to RMB 2.135B ($306mm) from RMB 2.640B
  • Earnings Per Share Loss RMB 1.52 ($0.20)

H-Share Update

The Hang Seng gave up morning gains of +0.4% in the afternoon session to close -0.63%/160 index points to close at 25,231 on volume off -20% from yesterday though still above the 1-year average. Breadth was off with only 15 advancers and 33 decliners led lower by index heavyweights Tencent -1.2%/-30 index points, energy giant CNOOC was the day’s worst performer -5.86%/-27 index points, and Ping An Insurance -1.12%/-16.9 index points. Real estate companies had a good day led by China Overseas Land & Investment +2.52%/+7.7 index points. Hong Kong-domiciled companies outperformed China-domiciled companies -0.31% versus -0.82% using the HS China Enterprise and HS HK 35 indexes as proxies. The Chinese companies listed in Hong Kong within the MSCI China All Shares Index -0.72% with real estate +0.62% and staples +0.01%. Energy had rough day -2.87%, tech -2.15%, discretionary -1.24%, communication -1.17%, materials -0.96%, health care -0.72%, financials -0.23%, utilities -0.09% and industrials -0.07%. Southbound Connect volumes were elevated, which seems to be the new normal, as Mainland investors were buyers by a small margin today. Volume leader CCB had 9 to buyers, Tencent was sold 2 to 1 and ICBC bought 30 to 1. Mainland investors bought $774mm of Hong Kong stocks while Southbound Connect accounted for nearly 9% of Hong Kong turnover.

A-Share Update

Shanghai and Shenzhen slumped into the market close -0.94$ and -1.48% as volume slumped -10% from yesterday though above the 1-year average. Breadth was negative with 1,360 advancers and 1,279 decliners as large caps outperformed mid and small caps. Sector performance was the driver of market cap divergence, as usual. The Mainland stocks within the MSCI China All Shares Index were down -1.36% led lower by tech -2.81%, health care -1.79%, materials -1.76%, financials -1.62%, communication services -1.56%, discretionary -1.14%, real estate -0.91%, industrials -0.6%, utilities -0.43%, energy -0.27% and staples -0.16%. Northbound Connect flows were interesting as Shanghai Connect had very slight sellers/basically flat while Shenzhen Connect had more pronounced selling. Shenzhen selling volumes were significantly tilted to the downside. MSCI inclusion stock Kweichow Moutai had net inflow today despite foreign investors selling $1.074 billion of Mainland stocks. Northbound Connect accounted for 4.3% of Mainland turnover.

February Credit Data & Money Supply

Aggregate Financing 855B versus estimate 1,585B versus January’s 5,070B
New Loans 905B versus estimate 1,120B and January’s 3,340B
M2 8.8% versus estimate 8.5% and January’s 8.4%

Takeaway: Today’s data wasn’t a market mover as expectation were very low despite economists’ estimates being way off. We should see the loan data rebound in March.

Last Night's Prices & Yields

  • CNY/USD 6.96 versus 6.96 yesterday
  • CNY/EUR 7.85 versus 7.92 yesterday
  • Yield on 1-Day Government Bond 1.60% versus 1.60% yesterday
  • Yield on 10-Year Government Bond 2.61% versus 2.61% yesterday
  • Yield on 10-Year China Development Bank Bond 3.09% versus 3.11% yesterday
  • Commodities largely higher on the Shanghai & Dalian Exchanges with Dr. Copper were off -0.04%