Key News

Asian equities were off modestly relative to the US selloff yesterday in a strong display of relative strength. The Hang Seng Index opened -1.69% but clawed back to close only -0.49% lower. However, it is worth noting that the broader Hang Seng Composite Index gained +0.23% after opening -1.5% lower. The narrow, 50-stock Hang Seng Index has a 44% weight to financials, which were off -0.93%. Today was a massive day for earnings in Hong Kong as Yum China Hong Kong gained +3% after reporting Q3 earnings before the market’s open. Hong Kong volume leaders were Tencent, which gained +0.67% on another very strong day of Southbound Connect inflows, Meituan Dianping, which gained +6.14% on very strong Southbound Connect inflows as well, Alibaba HK, which fell -1.56%, Ping An Insurance, which fell -1.83%, BYD, which gained +5.03%, and Hong Kong Exchanges, which gained +1.54%.

Alibaba’s weakness overnight was a little surprising as Ant Group’s Shanghai listing is oversubscribed 872 times and Alibaba’s Singles Day pre-sales kicked off with an estimated $7.5 billion in sales.

Southbound Connect, the trading platform that allows Mainland investors to access Hong Kong stocks, was heavily skewed to buying as Mainlanders bought a net $1.458 billion worth of Hong Kong stocks.

Shanghai and Shenzhen were off in the morning -0.49% and -0.8%, respectively, but rebounded +0.11% and +0.68%. The policy meetings drafting the 14^th Five Year Plan concluded today and winning sectors are expected to be domestic consumption, electric vehicles/clean energy, semiconductors/5G/cloud/data, and health care. However, fossil fuels are likely to fall out of favor as China sets out to be carbon neutral by 2050. The Mainland’s most actively-traded stock was BYD, which surged +4.47% after strong earnings. The electric vehicle (EV) maker was followed by liquor company Wuliangye Yibin, which rocketed +4.18% following an equally strong earnings release, and Kweichow Moutai, which gained +0.67%. Foreign investors bought a net $266 million worth of Mainland stocks today. CNY did appreciate slightly versus the US dollar.

An Asia media source noted Australia’s State Super pension plan will make a dedicated All China investment, i.e. without including China in the Emerging Markets bucket, for the first time. China is growing into an asset class distinct from emerging markets due to the sheer size of China within Emerging Markets as well as its differentiated performance characteristics.

In the early 2000s, many US institutional investors adopted the Yale Endowment model and, as a result, a portion of the private equity allocation went into China, which led to tremendous results. Bytedance’s run-in with the US is a particularly interesting case as two US private equity firms are the company’s largest shareholders. Your alma mater is likely among their clients! US institutional investors have had to create dedicated China allocations due to the success of their private equity portfolios there, which should lead to growth for the public equity portfolios. For individual investors, we didn’t have the tremendous returns generated from Chinese private equity. The definition of China for publicly traded stocks was focused on old economy sectors such as financials, energy, industrials, materials and real estate. The last decade has been driven by growth stocks, but this is a global phenomenon.  

US-listed New Orient’s (EDU US’) Hong Kong listing has generated a great deal of broker chatter as the company looks to raise $1.4 billion on the city’s exchange.

An institutional broker noted that nearly 50% of US high yield loans have been downgraded year to date. I have a festering worry about US credit driven by a less than V-shaped recovery. Where do investors go for income? Stock Connect’s sibling Bond Connect is the trading platform that allows foreign investors to invest in Mainland Chinese bonds. Inflows have been very strong with $438 billion worth of Mainland holdings being held by foreign investors. I believe this has been driven mostly by European and Asian investors, who are drawn to China’s relatively high yields.

H-Share Update

The Hang Seng Index opened deeply lower but managed to scrap back to close down only -0.49%/-122 at 24,586. Volume was up a touch, +0.4% from yesterday, placing last night’s level above the 1-year average. Meanwhile, breadth was off with 15 advancers and 34 decliners. The 204 Chinese companies listed in Hong Kong and within the MSCI China All Shares Index gained +0.58% led by discretionary +3.74%, tech +1.69%, staples +1.03% while financials -1.12%, energy -1.05%, and health care -0.93%. Southbound Connect volumes were moderate/high as Mainland investors were net buyers of Hong Kong stocks.

A-Share Update

Shanghai and Shenzhen opened lower but recovered +0.11% and +0.47% to close at 3,272 and 2,249, respectively. Volume was up +6.5%, which is just below the 1-year average, while breadth was off with 1,443 advancers and 2,260 decliners. The 518 Mainland stocks within the MSCI China All Shares Index gained +0.64% led by health care +2.35%, discretionary +2.14% and staples +1.83%. Meanwhile, energy -0.82%, materials -0.66, and utilities -0.66%. Northbound Connect volumes were moderate as foreign investors bought a net $266 million worth of Mainland stocks.

Last Night’s Exchange Rates & Yields

• CNY/USD 6.71 versus 6.73 yesterday
• CNY/EUR 7.84 versus 7.90% yesterday
• Yield on 1-Year Government Bond 1.70% versus 1.70% yesterday
• Yield on 10-Year Government Bond 3.19% versus 3.18% yesterday
• Yield on 10-Year China Development Bank Bond 3.67% versus 3.67% yesterday