Key News

Asian equity markets opened lower, down by nearly -10% in most cases, but managed to rise off the lows. In a scenario that played out across most of the region, Hong Kong opened down by -7% but managed to “only” lose -1%. Japan was still off -6%, making it the region’s worst performer. Meanwhile, Korea lost -3% and Malaysia -5%. India opened down -10%, but managed a nice gain of 4% while Thailand and Indonesia ended in the green up 1% and +0.24%

Brokers noted that margin calls may have been a factor in the extremely volatile trading. There was an interesting divergence between China and Hong Kong last night that is relevant for all investors. New economic sectors outperformed old economic sectors, which has been a strong trend in both markets. We are in a growth-oriented market that COVID-19 is likely to exacerbate. Alibaba’s Hong Kong listing gained +1.54% and Tencent +0.39% though food delivery Meituan Dianping was down -1.98%. My thesis isn’t perfect, but, in the context of a self-quarantine, people are likely to need a great deal of internet technology. This means that this sector divergence may play out in the US as well.

The other key observation regards the divergence between foreign investors and Mainland investors. Mainland investors increased their buying of Hong Kong stocks. Meanwhile, foreign investors fled Chinese and likely EM/Asia equities. Who is right? We know US investors are in panic mode due to policy uncertainty and a lack of credible answers around COVID-19. My money is on Mainland investors buying the dip!

The PBOC lowered certain banks’ reserve requirement ratio (RRR) after the market close, freeing up RMB 550B ($78B) for lending. The lending, in turn, will be geared toward small and medium-sized enterprises to help support them face the economic fallout of covid-19. 

A Mainland media source used a traffic app to calculate the extent China to which China has gone back to work. They examined how long it takes to get around 30 Chinese cities. At the beginning of March, traffic was 20% better than long-term average. However, it did vary by city. For instance, Shanghai traffic was down by only 15% while Beijing traffic was down by nearly 30% and Wuhan traffic by nearly 40%. The author, a former Canadian government official living full time in Shanghai, noted that in his neighborhood life has not returned to normal yet, but is getting close.

Yesterday was the worst day I’ve ever seen. There were worse days statistically but this was a panic that played out in real time. Brazil lost 17% in a day! That’s insane! A small reason I entered the ETF world nearly twenty years ago was because I already had some experience in closed-end funds (the biggest reason was dumb luck!). I still track a few closed-end funds as a sentiment indicator. My favorite CEF dropped to a 20% discount to NAV yesterday! I am not issuing a strong buy signal, but there are probably positions to be had at a steep discount.

H-Share Update

The Hang Seng opened lower -7.36% though grinded higher throughout the trading day to close -1.14%/-276 index points at 24,032. Volume spiked +32% from yesterday and came in at more than twice the 1-year average. Breadth skewed negative with 12 advancers and 37 decliners. Leading stocks were down, led lower by HSBC -2.04%/-45.9 index points, China Mobile -4.6%/-45.3 index points and CK Hutchison -5.29%/-24 index points. The day’s worst performer was Shenzhou International -6.66%/-14 index points. Meanwhile, Apple supplier Sunny Optical +1.98%/+5 index points likely due to Apple’s announcement that stores in China have re-opened.  China-domiciled companies outperformed Hong Kong-domiciled companies by a wide margin -0.78% versus -1.87% using the HS China Enterprise and HS HK 35 indices as proxies. The Chinese companies listed in Hong Kong within the MSCI China All Shares Index lost -0.64% as energy and tech gained +0.89% and +0.38%. Utilities lost -2.28%, staples -2.14%, discretionary -1.76%, materials -1.31%, industrials -1.2%, health care -0.94%, real estate -0.92%, financials -0.53% and communication -0.2%. Southbound Connect, the trading platform that allows investors in Mainland China to transact in Hong Kong-listed stocks, saw the highest volumes that I can recall and buying volume exceeded selling by more than 2X. Volume leader China Construction Bank (CCB) saw 27 to 1 buying, Tencent 2 to 1 buying and ICBC 87 to 1 buying. All told, Mainland investors bought $2.081 billion worth of Hong Kong stocks today which is 4X the average. Southbound Connect volume accounted for nearly 10% of HK turnover.

A-Share Update

Shanghai and Shenzhen opened lower -4.08% and -5.18% but grinded higher to close -1.23% and -1.08% on volume that was +15% higher than yesterday and well above the 1-year average. Breadth was off with only 793 advancing stocks and 2,942 declining stocks as mid-caps and small caps held up better than large caps. The Mainland stocks within the MSCI China All Shares Index were off -1.3% led lower by materials -2.12%, energy -1.97%, utilities -1.89%, health care -1.69%, staples -1.66%, financials -1.31%, communication -1.25%, industrials -1.12%, discretionary -0.98%, and tech -0.23%. Northbound Connect, the trading venue allowing foreign investors to buy Mainland stocks, had very high volumes as foreign investors sold Mainland stocks to the tune of -$2.106B. MSCI inclusion stocks Kweichow Moutai and Ping An Insurance were sold 3 to 1. Foreign trading accounted for 5% of Mainland turnover. For the week, foreign investors sold $5.988 billion worth of Mainland stocks.

Last Night’s Prices & Yields

• CNY/USD 6.99% versus 7.03% yesterday
• CNY/EUR 7.77% versus 7.83% yesterday
• Yield on 1-Day Government Bond 1.42% versus 1.57% yesterday
• Yield on 10-Year Government Bond 2.68% versus 2.64% yesterday
• Yield on 10-Year China Development Bank Bond 3.12% versus 3.08% yesterday
• Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper were off -0.51%