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The Least-Owned Equity Rally Continues as Headlines Keep Investors on Sidelines

4 Min. Read Time

Key News

Asian equities posted modest gains as Hong Kong and China stood out as outperformers once again. Hong Kong shrugged off reports of a dozen new coronavirus cases as volume leader Alibaba HK rose +10.01% following an analyst upgrade and the firm’s denial of an Ant Financial IPO. Tencent played Atlas once again rising 3.68% and holding up the Hang Seng Index, which was up +80 index points while Tencent was up +115 index points. Growth names had a strong day with Meituan Dianping +5.01%, HK +7.43%, and NetEase HK +10.04%.

I caught Josh Brown on CNBC TV speaking to investors’ preference for growth. This is clearly becoming a global phenomenon. Tech had a strong day led by smart phone makers and their suppliers after an analyst upgrade. One broker noted that Geely’s strength can be partially explained by a planned STAR Board IPO. The Seminconductor Manufacturing STAR Board IPO has suddenly gone quiet. Mainland investors were strong buyers of Hong Kong stocks again via Southbound Stock Connect. The Mainland market had another strong day on massive volumes as China’s financial regulator CSRC begins cracking down on illegal margin providers though margin levels are still well off the 2014/2015 highs. Health care had a strong day though I don’t see any news other than a small number of new cases in Hong Kong and Japan. Northbound Stock Connect saw another day of large inflows, which is discussed below. CNY, China’s currency, broke below the 7 level to close at 6.98, not far off from January’s 6.85. China’s bond market sold off again as Mainland investors reallocate to stocks over fixed income.

The big question after this rally is its sustainability. I am big believer in rebalancing as it is always good to take some profits after big moves while one should be prepared to buy on declines. This feels different to me. As we noted on flows yesterday, the US-listed China equity ETF space is shrinking despite the great performance as the constant barrage of negative headlines keep US investors sidelined. This rally has been exceedingly under-owned on the part of US investors. I suspect pullbacks will be bought. Tom Dorsey of technical analyst firm Nasdaq Dorsey Wright has always used magazine covers to show the fallacy of investing by them. I can’t think of a better example than today.

Reuters is reporting that Bilibili (BILI US) is exploring a Hong Kong listing.

I caught up with my friend Stephen, a commodities guru, about China’s purchases of US soybeans. The weekly crop report will be released today around noon. It should provide some insight into whether China is buying US soybeans and to what extent.

Yesterday, we discussed the possibility of Ant Financial going public in Hong Kong. I dug around on how much investment banks made on Alibaba’s IPO. The total: $300mm! Alibaba had an incentive kicker that bankers hit so they were more generous than other listings. I would put the lost revenue on the Ant Financial IPO at about $200mm, which Hong Kong bankers will pocket versus their US colleagues. Bummer!

Yesterday I caught up with technical analyst Michael Oliver of Momentum Structural Analysis. He had noted the breakout of Mainland China, stating “Bear trend of the last 5 years – over!”. Not to put words in his mouth, but he likes China in addition to Emerging Markets and commodities and is becoming increasingly worried about US equities.

Hong Kong Exchanges does a great job providing transparency on inflows/outflows for Northbound and Southbound Stock Connect. However, ascertaining cumulative flows is a fairly manual process, which is unfortunate for yours truly. Yesterday, I mentioned that US-listed China equity ETFs have seen outflows. This begs the question: who is buying via Northbound Stock Connect? It is very likely that the inflows are driven by active managers who, as we stated months ago, were tragically underweight to China. Mainland China promptly outperformed the S&P 500 in 2019 and again YTD. Oops. Active managers are likely re-weighting their portfolios with Chinese A shares.

H-Share Update

The Hang Seng bounced around the room to close +0.31%/+80 index points at 26,210. Volume increased +5.4% from yesterday, which is more than 2X the 1-year average. Breadth was off with 19 advancers and 30 decliners as Tencent +3.68%/+115 index points, HK Exchanges +3.52%/+47 index points, and China Construction Bank -0.91%/-19 index points. Today’s best performer was Hang Lung Properties, which rose+4.6%/+6 index points, while Wharf Real Estate was the day’s worst performer after falling -3.61%/-3.8 index points. China-domiciled companies +0.31% compared to Hong Kong-domiciled companies -0.35% using the HS China Enterprise and HK 35 indexes as proxies. The Chinese companies listed in Hong Kong within the MSCI China All Shares Index +1.52% with tech +3.38%                 communication +3.29%, discretionary +2.75%, utilities +1.89%                 health care +1.57%, materials +0.57%, industrials +0.41%, energy +0.41%, staples -0.18%, financials -0.55%, and real estate -0.63%.

Southbound Connect volumes were high again as Mainland investors were net buyers of Hong Kong stocks. Volume leader Semiconductor Manufacturing was flat, Tencent was bought heavily, while Meituan and Xiaomi were net buys as well. Mainland investors bought $961mm worth of Hong Kong stocks today as Southbound Connect trading accounted 11% of Hong Kong turnover.

A-Share Update

Shanghai and Shenzhen grinded higher all day to close +1.39% and +2.7% at 3,450 and 2,257, respectively, as volume rose +11%, which is 2.5X the 1-year average. Breadth was absurdly strong with 3,244 advancers and 504 decliners as mid and small caps trounced large caps. The Mainland stocks within the MSCI China All Shares Index gained +2.22% with health care +4.06%, tech +3.69%, materials +3.17%, communication +2.89%,            industrials +2.6%, energy +2.47%, real estate +2.32%, staples +2.13%, discretionary +1.59%, utilities +0.7%, and financials +0.19%.

Northbound Stock Connect volumes were strong again as foreign investors were net buyers of Mainland stocks. Shanghai Connect volume leader Ping An was bought 2 to 1 while Kweichow Moutai was bought 7 to 5. Shenzhen Connect volume leader Gree Electric Appliances was bought 2 to 1, Contemporary Amperex Technology was bought 13 to 9, and Wuliangye Yibin was sold 3 to 1. Foreign investors bought $1.138B worth of Mainland stocks today as Northbound Connect trading accounted for 4.6% of Mainland trading.    

Last Night’s Exchange Rates & Yields

  • CNY/USD 6.99 versus 7.00 yesterday
  • CNY/EUR 7.90 versus 7.93 yesterday
  • Yield on 1-Day Government Bond 1.45% versus 1.26% yesterday
  • Yield on 10-Year Government Bond 3.08% versus 3.06% yesterday
  • Yield on 10-Year China Development Bank Bond 3.47% versus 3.38% yesterday