Key News

Asian equities were mixed overnight as India fell hard after last week’s massive stimulus bill failed to excite investors. Most markets saw modest gains or losses. Tech was off across Asia as US sanctions on Huawei rippled through manufacturers and suppliers.

EM benchmark heavyweight Taiwan Semiconductor (2330 TT) fell -2.68% on the news while South Korea’s Samsung +1.99% as the latest US noose-tightening hurts Huawei’s mobile phone business, which competes with the South Korean giant. Globally, if you can’t afford an iPhone or a Samsung cell phone you buy a Huawei cell phone. I’ve not been to an airport in Europe, Asia, the Middle East, or South America that didn’t advertise Huawei cell phones. Semiconductor Manufacturing International Corp (981 HK) was up +8% until investors realized that the Chinese chip maker uses Taiwan Semiconductor to make its high-end chips. In a stunning reversal, the stock closed -6% while Apple and Huawei suppliers AAC (2018 HK) and Sunny Optical (2382 HK) were off -6% and -11%, respectively, on the news. 

Volume leader Tencent (700 HK) managed a small gain +0.43% while Alibaba (9988 HK) popped +3.1% after Hang Seng announced it would in fact move ahead with including the stock in its flagship index. It is worth noting that telemedicine companies have been very strong outperformers. However, today Alibaba Health and Ping An Health were off -4% and -8%, respectively. Energy stocks had a great day on news that China is buying oil in sizable amounts at low prices. Tech, which makes up a bigger weight of the Shenzhen Stock Exchange than the Shanghai, was off on both exchanges. The five most heavily traded stocks on the Mainland were all tech stocks and were off -2% to -6%.

After the close in Hong Kong, Hang Seng Indexes announced that secondary-listed and weighted voting rights companies will be eligible for its August rebalance. This follows Friday’s announcement that they would not be eligible for the June rebalance. This should be a strong catalyst for Alibaba and Meituan Dianping based on passive flows.

Barron’s lead writer Randall Forsyth wrote this weekend “An escalating trade war during what might be a depression? Haven’t we seen this movie before? And didn’t we hate its ending?” This is why I believe US-China political rhetoric is apt to be more bark than bite. This is a two-way street. In Hans Rosling’s great book, which I highly recommend, entitled Factfullness, he notes the world’s 7 billion population is comprised of 1 billion in North and South America, 1 billion in Africa, 1 billion in Europe, and 4 billion in Asia and the Middle East. Today, those living in the 1^st world i.e. US, Europe, and Japan account for 11% of the world’s population and 60% of the consumer market. He writes that by 2027 that the “rich countries’” percentage of consumption will fall to 50% and by 2020 down to 40%. Short-term US policy targeting Huawei could pose a long-term risk to US companies who have historically benefitted from this trend.

This is a big week for US-listed Chinese companies' earnings. Today after the close Baidu, IQ and BILI will all report. Sina and Weibo will report before the market opens tomorrow morning and NetEase after the close. Alibaba and Pinduoduo will report before the market open on Friday morning. It is interesting that Pinduoduo chose to release its results on the same day as its rival.

H-Share Update

The Hang Seng opened lower but quickly rallied to close near the day’s high +0.58%/+137 index points at 23,934. Volume picked up nearly 5% from Friday while breadth was strong with 43 advancers and 6 decliners. The index was led higher by energy giant and today’s best performer CNOOC +7.84%/+38 index points. The day’s worst performer was Sunny Optical -11%/-26 index points and China Mobile +1.33%/+14 index points. Chinese and Hong Kong-domiciled companies traded inline +0.54% and +0.44%, respectively, using the HS China Enterprise and HS HK 35 indexes as proxies. The Chinese companies listed in Hong Kong and within the MSCI China All Shares Index gained +0.51% led higher by energy +5.6%, materials +1.96%, industrials +0.9%, real estate +0.85%, discretionary +0.84%, staples +0.7%, communication +0.56%, health care +0.45% and financials +0.32%. Utilities and tech were off -1.39% and -3.34%, respectively. Southbound Connect volumes were moderate to light as Mainland investors were net buyers of Hong Kong stocks today by a small margin. Volume leader Semiconductor Manufacturing had a small net selling on 3X the volume of Tencent which had 2 to 1 buyers. Mainland investors bought $174mm worth of Hong Kong stocks today as Southbound Connect accounted for 10% of Hong Kong turnover.

A-Share Update

Shanghai and Shenzhen overcame an opening loss to rally until a late afternoon slump closing +0.24% and -0.43%, respectively. Breadth was tilted negative with 1,732 advancers and 1,922 decliners as volume surged +16% from Friday. Large caps had a strong day outperforming mid and small caps. The Mainland stocks within the MSCI China All Shares Index were flat -0.009% as staples +2.47%, materials +1.28%, health care +1.26% and real estate +1.04% while industrials -0.03%, energy -0.23%, financials -0.29%, utilities -0.58%, discretionary -0.79%, communication -1.07% and tech -3.58%. Northbound Connect volumes were moderate as foreign investors were net buyers of Mainland stocks. Volume leader Kweichow Moutai saw buyers outpace sellers by more than two times while Gree Electric Appliances was sold by a small amount. Foreign investors bought $478mm worth of Mainland stocks today as Northbound Connect accounted for 5% of Mainland turnover.

Last Night’s Prices & Yields

• CNY/USD 7.11 versus 7.11 on Friday
• CNY/EUR 8.66 versus 8.61 on Friday
• Yield on 1-Day Government Bond 0.68% versus 0.68% on Friday
• Yield on 10-Year Government Bond 2.73% versus 2.68% on Friday
• Yield on 10-Year China Development Bank Bond 3.03% versus 2.97% on Friday