Key News

Asian equities were largely lower following yesterday’s epic loss in the US. However, it is worth noting that US futures started to rally during the trading day. Japan, Hong Kong, and Australia managed gains. Meanwhile, most of the region was off to varying degrees. Indonesia and Taiwan were hit especially hard. The Philippines closed its stock market, prompting questions over whether exchanges will stay open. Messaging from the NYSE and the Hong Kong stock exchange implied that they will stay open. Hong Kong was helped by strength in Tencent in advance of its earnings call tomorrow and after having been extremely oversold. One broker noted that the Hang Seng is trading at liquidation levels, i.e. at a Price to Book of 1. You don’t see an entire market selling at that level. While Hong Kong is clearly oversold, it is harder to get constructive on the medium-term prospects due to the evaporation of tourism.

One broker noted that many retail investors are beginning to capitulate and give up previous gains. Meanwhile, institutional investors are “de-risking”. It is worth noting that Chinese investors saw another record day of buying in Hong Kong. Meanwhile, foreign investors continue to shed Mainland stocks. Airlines were especially weak as travel bans go global.

This morning, Q4 earnings were released by Tencent Music (TME US), HUYA (HUYA US) and JOYY (YY US). All three look solid though I plan to dive further into the releases and report back. Overnight, JD.com (JD US) announced plans to relist in Hong Kong and buy back shares. 

China’s cases of COVID-19 are largely recovering and economic activity continues to return to normal. One broker noted that the global economic slowdown is a great risk to China. I hope that efforts to limit travel, work from home, and self-quarantine will limit the spread. At the same time, I hope that people realize that the elderly and those with pre-existing health conditions are especially at risk.

H-Share Update

The Hang Seng opened lower, hitting an intra-morning loss of -1.68% though managed to rally in the afternoon to close +0.87%/+200 index points at 23,263. Turnover was off -4.9% from yesterday though still 50% higher than the 1-year average. Breadth was tilted positive with 26 advancers and 23 decliners as index heavyweights helped lift the index. AIA gained +2.73%/+64 index points, HSBC +2.63%/+58 index points and Tencent +2.34%/+54 index points. The day’s best performer was textile manufacturer Shenzhou International +5.32%/+10.9 index points while China Unicom was the day’s worst performer -3.75%/-3 index points and real estate firm Country Garden -3.45%/-6.9 index points on its heels. Hong Kong-domiciled companies outperformed China-domiciled companies as the former gained +0.88% versus -0.12% using the HS China Enterprises and HS HK 35 indexes as proxies. The Hong Kong-listed Chinese stocks within the MSCI China All Shares Index gained +0.01% led by Tencent. In sectors, communications +1.7%, health care +0.87%, tech +0.32%, staples +0.16% and financials +0.06%. Real estate was down -2.72%, utilities -2.67%, materials -2.29%, industrials -1.97%, discretionary -0.86% and energy -0.47%. Mainland Chinese investors were buyers of Hong Kong stocks by a 2 to 1 margin on elevated volume. Volume leader Tencent had 7 to 1 buyers and China Construction Bank saw 3 to 1 buyers while Sunny Optical was sold by a small margin. Mainland investors bought $1.27 billion worth of Hong Kong stocks while Southbound Connect trading accounted for 10% of Hong Kong’s turnover.

A-Share Update

Shanghai & Shenzhen were down -0.34% and -0.43% in choppy trading as volume slipped 15% from yesterday though were well above the 1-year average. Breadth was off overnight with 1,058 advancers and 2,596 decliners with large caps underperforming. The Mainland stocks within the MSCI China All Shares were off -0.7% with communication the only positive sector +0.57%. Staples were off -1.71%, real estate -1.66%, discretionary -1.34%, materials -1.28%, tech -0.51%, industrials -0.42%, energy -0.4%, financials -0.38%, utilities -0.05% and health care -0.04%. Foreign investors continue to shed equities including Mainland Chinese stocks as selling continued via the Northbound Connect trading program. Volumes were higher on the Shenzhen Connect but selling was more pronounced on the Shanghai. Volume leaders and MSCI Inclusion stocks Kweichow Moutai and Ping An Insurance were both sold 2 to 1 and not quite 2 to 1. Foreign investors sold $1.173 billion of Mainland stocks following yesterday’s -$1.402B. Northbound Connect trading accounted for over 5% of Mainland turnover.

Last Night’s Prices & Yields

• CNY/USD 7.01 versus 6.99 yesterday
• CNY/EUR 7.72 versus 7.79 yesterday
• Yield on 1-Day Government Bond 1.43% versus 1.43% yesterday
• Yield on 10-Year Government Bond 2.71% versus 2.68% yesterday
• Yield on 10-Year China Development Bank Bond 3.14% versus 3.10% yesterday