Daily Posts

US Investors’ Home Bias: Please Don’t Notice China’s Bull Market

Key News 

I’m not going to sugar coat it. Today was a MASSIVE volume day.

  • Hong Kong Volume +43% Day over Day, +50% Higher than the 1-Year Average
  • Mainland China volume nearly 2X 1-Year Average
  • Northbound Stock Connect volume 2X 1-Year Average
  • $2.421B of foreign buying on the Mainland China via Northbound Connect

Asian equities rode the Pfizer vaccine enthusiasm and positive economic data from both the US and China as the Hong Kong market opened following Wednesday’s market holiday. Growth stocks led the charge higher with volume leaders Tencent +3.99%, Alibaba HK +2.29% and Semiconductor Manufacturing surging +17% in advance of its STAR Board IPO which, according to broker chatter, is set to launch mid-next week. Meituan Dianping surged +4.36% while JD.com HK +1.73%. It was a very broad rally today lifting all boats on very high volumes, which technical analysts will love. An example? Ping An Insurance’s CEO resigned and the stock went up +3.16%!

Mainland China also had very high volumes and foreign buying as the PBOC’s lowering of financing costs and positive investor sentiment both lifted financials. Property names had a strong day on chatter that home prices have increased. Shanghai, which skews toward value/large caps, has outperformed the Shenzhen, which skews toward growth/mid-small caps, for the second day in a row though brokers believe that growth investors are taking profits in order to participate in Seminconductor Manufacturing’s IPO next week. Healthcare is cited as a sector experiencing STAR Board profiting taking as well. This is despite one research firm noting that Sino Biopharmaceutical (1177 HK) has converted one of its facilities to allow COVID-19 vaccine production. I will track down my favorite healthcare analyst overnight to confirm this. JD.com announced that it will list its data unit on the STAR Board, which should lift its stock.

Reflecting on the moves to bolster Hong Kong’s standing as a financial hub, such as Wealth Management Connect and MSCI futures in Hong Kong, wouldn’t adding Alibaba’s Hong Kong listing to Southbound Stock Connect make sense? In order to qualify for Connect inclusion, Hong Kong must be the issuer’s most heavily-traded venue. If there was one company that merits making an exception, it is Alibaba. This is pure conjecture on my part. If it happens, you heard it here first. If it does not, kindly forget this conversation.

If, according to Mike Pompeo, Hong Kong is just another Chinese city, will MSCI agree? The MSCI Hong Kong Index is part of developed markets and comprised of Hong Kong-domiciled companies such as AIA Group, Hong Kong Exchanges, and a handful of property stocks and Macau casino stocks. As of May 29th, MSCI HK had 43 holdings with a market cap of $416B versus MSCI China’s 704 holdings with $2 trillion of market cap. But, MSCI Hong Kong is but a rounding error in MSCI EAFE (developed markets) at ~3%. That market cap is just below India’s $423B and nearly 8% of MSCI Emerging Markets (EM). Adding Hong Kong to EM would shrink China’s weight slightly, but put China at nearly 50% of EM. Throw in the full China A Inclusion combined with Hong Kong and China is around 60% of EM. This is not going to happen anytime soon, but will happen eventually.

We have been fielding a great deal ot of questions as to why Alibaba’s stock has lagged peers, despite its stellar earnings record. There are a variety of opinions out there, but one respected contact believes that the main issue surrounds the fact that Alibaba isn’t the only show in town. Pinduoduo and JD.com are also capitalizing on China’s consumer and doing so a warp speed. Another respected opinion is that Alibaba is already widely held by investors. I was told that hedge funds are shorting Alibaba and going long China/US/EM e-commerce stocks. There is no bigger BABA Bull than me. However, taking a diversified basket approach has its advantages. I need to hop onto a research call on Chinese online video companies such as Bilibili, which represents another great space.

I read that BHP has had issues with their Chile copper mines due to the coronavirus. Dr. Copper’s rebound since March is a great confirmation of China’s economic rebound though decreased supply leads to higher prices assuming demand remains constant.

I just want to reiterate something from yesterday’s note. SEC Chair Jay Clayton served as counsel on Alibaba’s US IPO. Alibaba employed several law firms on the IPO including Mr. Clayton’s former employer Sullivan & Cromwell. Interpret as you see fit though the phrase “do as I say not as I do” comes to mind.  

H-Share Update

The Hang Seng opened higher and kept moving up to close +2.85%/+697 index points at 25,124. Volume jumped +43%, which is nearly 2X the 1-year average. Wow! Breadth was strong with 48 advancers and 2 decliners led by Tencent +3.99%/+115 index points, AIA +3.32%/+87 index points, and HK Exchanges +6.06%/+77 index points. Today’s best performer China Life Insurance rose +9.74%/+37 index points while China Construction Bank fell -2.87%/-57 index points. China-domiciled companies rose +3.06% while Hong Kong-domiciled companies rose +2.58% using the HS China Enterprise and HK 35 indices as proxies. The Chinese companies listed in Hong Kong within the MSCI China All Shares Index gained +4.02% led by real estate +7.95%, tech +5.81%, materials +5.05%, communication +4.09%, financials +4.04%, energy +3.69%, industrials +3.67%, discretionary +3.21%, staples +2.99%, utilities +2.46%, and healthcare +0.85%.

Southbound Stock Connect volumes were heavy with Tencent seeing 2 to 1 buying and Semiconductor Manufacturing seeing mixed volume. Mainland investors bought $655mm worth of Hong Kong stocks today as Southbound Connect trading accounted for 10.5% of Hong Kong turnover.

A-Share Update

Shanghai and Shenzhen gained +2.13% and +1.25% to close at 3,090 and 2,016, respectively. Volume jumped +19% from yesterday’s +21% to nearly 2X the 1-year average. Breadth was strong with 2,799 advancers and 915 decliners as large caps outperformed mid and small caps. The Mainland stocks within the MSCI China All Shares Index gained +1.69% with financials +4.04%, real estate +3.67%, energy +2.53%, materials +1.725, staples +1.71%, industrials +1.34%, discretionary +0.99%, tech +0.89%, communication -0.04%, utilities -0.04%, and healthcare -0.89%.

Northbound Connect volumes were MASSIVE as we saw 2X the average in heavy buying. Volume leaders Kweichow Moutai and Ping An saw buyers outpace sellers by 2 to 1 on the Shanghai while liquor stock Wuliangye Yibin was sold slightly and East Money Information was sold 2 to 1. Foreign investors bought $2.421B worth of Mainland stocks today as Northbound Connect trading accounted for 6.9% of Mainland turnover.

Last Night’s Prices & Yields

  • CNY/USD 7.07 versus 7.07 yesterday
  • CNY/EUR 7.97 versus 7.96 yesterday
  • Yield on 1-Day Government Bond 1.11% versus 1.33% yesterday
  • Yield on 10-Year Government Bond 2.86% versus 2.85% yesterday
  • Yield on 10-Year China Development Bank Bond 3.13% versus 3.15% yesterday