Black Gold Turns To Dust… Again, Notes From China On Re-Opening
Asian equities followed the US equity market south as oil’s shocking plunge along with other negative headlines weighed on sentiment. Hong Kong’s woes were compounded when Fitch downgraded its debt rating to AA- from AA. Meanwhile, Hong Kong’s social distancing rules were extended by another two weeks. There were also rumors that North Korean leader Kim Jong Un was in ill health following a surgery. Why would that be a bad thing? Kim has not named a successor to the nuclear armed country.
Recent outperformers underperformed in Hong Kong last night as traders scalped profits. Volume leaders Tencent -1.96%, Alibaba HK -0.78% and Ping An -1.46% show that quality companies were not immune to the carnage. Sino Biopharma fell -7.91% after CEO Tse Ping, who inherited his role from his parents, sold $200mm in shares at a discount to the previous day’s close. It is worth noting that Mainland investors were net buyers of Hong Kong stocks despite the weakness. As mentioned yesterday, Hong Kong and Mainland Chinese equity indices have managed to hold support levels. The Mainland was off on the macro news though held up well by comparison. I find it interesting that India and China are both importers of oil and should, in theory, benefit from low prices.
In considering how the US might open up, it is important to note that China did not open up all at once. Hotspot Hubei and its capital Wuhan remained in quarantine for weeks after the rest of the country returned to normal. Further, it is nonsense to apply the same rules to high density areas as to rural areas. China also slowed the spread by curtailing domestic air travel, which the US has done to some extent. China lifted the quarantine for the same reason we are in the US: economic necessity. The knock on effect of, say, a restaurant going under (workers unemployed, suppliers hurt) leads to economic dominos as the real estate firm that owns the restaurant’s property defaults on their loans. The pain then travels to banks and investors who own the bonds backed by the real estate firm, etc. This downward spiral can get scary fast. Lifting the US quarantine for non-hot spots is logical. That being said, the elderly and those with pre-existing health conditions must maintain vigilance for the foreseeable future. China’s recovery was not V-shaped, but U-shaped and still ongoing as certain industries such as restaurants and retail/off line stores (tertiary industries) are experiencing a slow recovery, despite the fact that industrial production has fully resumed.
Last Friday, March Retail Sales was released falling -15%. However, hidden within the release was a small gem: Online retail sales actually increased by 5.9%!
New Oriental Education (EDU US) released Q3 results before the market open this morning. Guidance was a bit soft, but the results look strong.
- Revenue +16% to $923mm
- Adjusted EPS $0.93 versus $0.69
- Q4 Revenue Forecast -8% to -10% or $806mm
The Hang Seng fell at the open and never came back -2.2%/-536 index points closing at 23,793. Volume surged 23% while breadth was awful with 1 advancer and 49 decliners. Index heavyweights led the way with AIA -2.77%/-67 index points, Tencent -1.96%/-52 index points and HSBC -2.25%/-43 index points. Today’s worst performer was Sino Biopharma -7.91%/-19 index points while CLP Holdings managed a +0.06%/0.2 index point making it the best performer. Hong Kong and Chinese companies were off equally -2.18% and -2.13% using the HS HK 35 and HS China Enterprise indexes as proxies. The Chinese companies listed in Hong Kong within the MSCI China All Shares Index lost -2.06% led lower by staples -3.45%, health care -2.7%, tech -2.59%, energy -2.56%, utilities -2.4%, staples -2.19%, -1.96%, real estate -1.94%, industrials -1.83%, financials -1.65% and materials -0.97%. Southbound Connect volumes were light but Mainland investors were very active buyers of Hong Kong-listed stocks. Volume leader Tencent had 3 to 1 buyers and Sino Biopharma 10 to 1 buyers tough Semiconductor Manufacturing was sold 3 to 2. Mainland investors bought $395 million worth of Hong Kong stocks today as Southbound Connect trading accounted for nearly 8% of Hong Kong turnover.
Shanghai & Shenzhen were off all day though managed an afternoon rally to close -0.9% and -0.82% as volume picked up 5.5% from yesterday. Breadth was off with 938 advancers 2,771 decliners as large, mid and small caps traded in line. The Mainland-listed stocks within the MSCI China All Shares Index declined 1.37% led lower by staples -1.81%, discretionary -1.65%, energy -1.63%, real estate -1.55%, materials -1.49%, financials -1.27%, industrials -1.26%, tech -1.23%, health care -1.2% and communication -1.13%. Northbound Connect volumes were moderate/light as foreign investors trimmed their Mainland positions. Volume leader Kweichow Moutai was bought slightly while Ping An Insurance was sold 3 to 1. Foreign investors sold -$387mm worth of Mainland stocks as Northbound Connect accounted for 4.5% of the Mainland’s turnover.
Last Night’s Prices & Yields
- CNY/USD 7.09 versus 7.07 yesterday
- CNY/EUR 7.70 versus 7.69 yesterday
- Yield on 1-Day Government Bond 0.46% versus 0.46% yesterday
- Yield on 10-Year Government Bond 2.58% versus 2.59% yesterday
- Yield on 10-Year China Development Bank Bond 2.86% versus 2.88% yesterday
- Commodities on the Shanghai & Dalian Exchanges were lower with Dr. Copper -1.63%