Daily Posts

DND (Drinks & Drugs) Rally Continues, Muted Market Reaction to Hong Kong Status Revocation

4 Min. Read Time

Key News

Asian equities had a strong day as Japan and Australia outperformed and Mainland China underperformed. Hong Kong was fairly resilient considering the fact that President Trump revoked Hong Kong’s special trade status though tech fell on news of the UK’s decision to eliminate Huawei telecom gear. Hong Kong has tightened social distancing rules to contain a third wave of coronavirus locally. The UK Huawei decision isn’t until 2027 so a lot could happen between now and then for Huawei, which is a private company.

Tencent played Atlas by lifting Hong Kong market again, rising +103 index points +3.43% while Alibaba HK +1.25%, Meituan Dianping +1.78%, and Xiaomi -0.37%. Semiconductors and tech were the big losers today as the Huawei news and the potential for tightening supply chains as sent Apple suppliers Sunny Optical and AAC Tech lower to close -3.09% and -5.86%, respectively. Meanwhile, ZTE HK fell -3.13%, HK -0.25%, and NetEase HK +1.29%. Shanghai and Shenzhen were off -1.56% and -2.07%, respectively, as growth, tech, and telecom all underperformed on the Huawei and US news. Semiconductor Manufacturing fell -8% today on sentiment, but will IPO on the STAR board tonight at 9:30 pm EST.

Shanghai is near the 3,300 level after closing at 3,361, which will be an important technical support level. Mainland China’s volume leaders were brokerage stocks, which have benefited from the market’s upswing though saw profit taking today. Staples and healthcare were strong performers as the DND trade, drinks and drugs, continues. This is despite Bernstein cutting the price targets of liquor stocks Kweichow Moutai -0.54% and Wuliangye Yibin +1.38%. I find it more interesting that Bernstein, a highly respected US research firm, is covering these stocks as their global asset management clients are clearly interested in Mainland Chinese stocks.

President Trump revoked Hong Kong’s special trade status. Market reaction: yawn. CNY did the opposite of what one would think as it appreciated versus the USD. The exchange rate fell below 7 to close at 6.9988. This was another “more bark than bite” moment as investors had anticipated the move. Much more importantly, the US isn’t moving to break the Hong Kong dollar peg by cutting off Hong Kong banks’ access to US dollars. That would crush global equities while severely impairing US companies in Hong Kong.

The USDA reported that China bought 69.4mm bushels of corn and 4.7mm bushels of soybeans in the last 24 hours in the one of the largest one-day purchases ever.

The government and regulators may take further steps to bolster Hong Kong as a financial hub. We’ve already seen the announcement of Wealth Connect, which allows Mainland capital to invest in Hong Kong financial products though timing and details are few. What else could they do? Add Alibaba HK to Southbound Stock Connect and allow a MSCI China A futures listing. Stay tuned!

Hillhouse is a prestigious Chinese private equity manager founded by a Yale graduate who subsequently worked for Yale Endowment CIO David Swenson. Founder Zhang Lei returned to China in 2005 after founding Hillhouse, which is named for a New Haven street, with $20mm of seed from Swenson. Zhang’s timing for PE investing was great as he invested in both Tencent and early on. Fast forward to today and Hillhouse manages $60 billion. On Monday, I noted that Hillhouse had taken a stake in healthcare company Joincare. Yesterday, we got news Hillhouse is also increasing its stake in US-listed Chinese biotech company Beigene. Bloomberg is reporting that Hillhouse will invest $1B in the biotech company, which would raise its stake to 12.6% from 7.5%. Hillhouse is raising its stake after the stock has risen 28% and 50% from its March lows. Don’t you find it difficult to buy a stock after a strong move? I do. I feel like I missed out on the initial move. Not buying inevitably leads to larger gains which is even more infuriating. I’m not saying Hillhouse is a Good Housekeeping Seal of Approval nor am I recommending the stock, but it may make for an interesting study in behavioral finance. From conversations with investors, many point out “I missed the move” which is one reason I am positive that the dip will be bought.

H-Share Update

The Hang Seng eased off morning highs to close +0.01%/+3 index points at 25,481 after a choppy session. Volume contracted -8% but remained +1.5X the 1-year average. Breadth was off with 13 advancers and 34 decliners led by Tencent +3.43%/+103 index points, China Construction Bank -1.28%/-25 index points, and HSBC +0.95%/+21 index points. Shenzhou International Group was the day’s best performer, gaining +4.7%/+11 index points while Apple supplier AAC Tech -5.86%/-6 index points. China-domiciled stocks were off -0.14% versus Hong Kong-domiciled stocks -0.25% using the HS China Enterprise and HK 35 indexes as proxies. The Chinese companies listed in Hong Kong and within the MSCI China All shares Index rose +0.61% with communication  +2.81%, discretionary +1.44%, industrials +0.71%, health care +0.54%, staples +0.37%, energy +0.16%, utilities -0.15%, real estate -0.25%, materials -1.01%, financials -1.16%, and tech -3.11%.

Southbound Connect volumes were high though they have eased a bit as Shanghai Connect turnover was HKD 21B and Shenzhen Connect was HKD 17B. Shanghai Connect volume leader Semiconductor Manufacturing HK saw $2.5B buys versus HK $3.2B sells, Tencent HKD 1.7B buys versus HKD 772mm sells, Xiaomi 390mm versus 267mm sells and Meituan 388mm buys versus 267mm sells.

A-Share Update

Shanghai and Shenzhen eased in the morning and closed -1.56% and -2.07% at 3,361 and 2,261, respectively, after reversing from an afternoon rally. Volume was of -8% on the Mainland but still 2X the 1-year average while breadth was way off with only 926 advancers and 2,858 decliners. Large caps outperformed mid and small caps by 1%. The Mainland stocks within the MSCI China All Shares Index lost -0.89% with health care +1.85%, staples +1.48%, utilities +1.37%, materials -0.84%, discretionary -0.96%, industrials -1.2%, financials -1.58%, real estate -1.97%, energy -2.43%, tech -3.6%, and communication -3.71%.

Northbound Stock Connect volumes were high as Shanghai turnover was RMB 67B and Shenzhen turnover was RMB 90B as sellers outpaced buyers on both by small margins. Shanghai Connect volume leader Kweichow Moutai was net sold with RMB 1.4B in buys versus RMB 2.2B in sells. Jiangsu Hengrui Medicine was net bought with RMB 1.5B buys versus 780mm sells. Ping An Insurance saw 910mm buys versus 684mm sells. Shenzhen Connect volume leader Wuliangye Yibin was sold 851mm buys versus 1.73B sells. Foreign investors sold $387mm worth of Mainland stocks today.

Last Night’s Exchange Rates & Yields

  • CNY/USD 6.99 versus 7.01 yesterday
  • CNY/EUR 7.99 versus 7.98 yesterday
  • Yield on 1-Day Government Bond 1.37% versus 1.37% yesterday
  • Yield on 10-Year Government Bond 2.96% versus 3.01% yesterday
  • Yield on 10-Year China Development Bank Bond 3.46% versus 3.47% yesterday