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Hong Kong & Mainland China Equities Continue to Climb The Wall of Worry

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Asian equities were mixed overnight as Hong Kong and China outperformed. Today’s positive market action was on high volume once again and came despite several headline headwinds including the New York Stock Exchange (NYSE) debating its decision not to delist the three China telecom stocks, another Executive Order banning Chinese apps, including Alipay, which no one uses here in the US, and rising coronavirus cases globally. They call this climbing the wall of worry.

What stuck out to me overnight was the strong buying of Hong Kong stocks by Mainland investors via Southbound Stock Connect. There have been numerous occasions where Southbound Connect volumes and activity have provided great clues to future market action. The flows are telling us something now! The 50-stock Hang Seng Index overcame a mid-day swoon to gain +0.15%, though the broader Hang Seng Composite gained +0.76% and the Hong Kong stocks within the MSCI China All Shares Index gained +1.19%.

Hong Kong volume leaders were Tencent, which gained +2.23% on buying from Southbound Connect, Xiaomi, which fell -3.97% as an analyst downgrade led to profit taking, Executive Order banned stock Semiconductor Manufacturing, which gained +12.94%, Meituan, which gained +4.52% on moderate Southbound buying, Alibaba HK, which gained +3.14%, China Overseas Land & Investment, which fell -3.8%, China Mobile, which gained +1.19%, JD.com HK, which gained +7.73% after a big day yesterday in the US, energy giant and potentially banned stock CNOOC, which gained +4.25%, and BYD, which fell -2.61%.

Software stocks were lower on the latest White House Executive Order on apps though Alipay and most of the apps mentioned see very little usage in the US.

Shanghai and Shenzhen diverged to close +0.63% and -0.03%, respectively, on above average volume. There was a cyclical rebound as value outperformed growth today. Meanwhile, large caps outperformed mid and small caps handily. Northbound Stock Connect volumes reflected this as well as Shanghai (large cap/value) saw net inflows and Shenzhen (mid-small/growth) saw net outflows. Bonds and CNY were basically flat while copper had a strong day.

I stumbled across a data point from the Daily Shot that astonished me. Emerging markets’ share of total US investor equity holdings is now at approximately 2.3%, which is off its high in January 2013 of 3.4%. I am not totally surprised as US equity outperformance over the last decade has led to a very strong home bias. However, markets sometimes do what is least expected, which, in this case, would be an EM rally while no one owns it.

Hong Kong Exchanges’ market cap is now $72 billion versus ICE’s $63 billion and CME’s $64 billion. Want to guess how this happened? Many of China's startups were spooked from listing in the US.

US-listed online auto seller Autohome (ATHM US) is expected to file for a Hong Kong listing soon.

Reuters had an article on the December launch of Mainland China’s first solar power ETF, which raised $1.62 billion. It is expected that several asset managers will follow suit as China’s goal to become carbon neutral by 2060 attracts global investor attention. I think the EU-China investment deal is a strong catalyst as well. The EU’s demand for China-manufactured solar and wind technology should be significant. China clean energy ETFs were likely among the best performing and least owned ETFs in 2020.

Xiaomi’s music app will shut down in early February as the company was unable to expand its music catalog, according to a Mainland media source. On the other hand, Tencent Music’s partnership with Universal Music should keep the hits coming.

H-Share Update

The Hang Seng overcame a mid-day swoon to close +0.15%/+42 index points at 27,692. Volume was up +1.4% from yesterday, which is +67% above the 1-year average. Meanwhile, breadth was decent with 27 advancers and 24 decliners. The 200 Chinese companies listed in Hong Kong and within the MSCI China All Shares Index gained +1.19% led by materials +4.01%, industrials +3.8%, energy +3.39%, discretionary +2.25%, communication +2.06%. Meanwhile, tech -1.92%, health care -1.04%, and staples -0.43%. Southbound Stock Connect volumes were very high once again as Mainland investors bought a massive $1.598 billion worth of Hong Kong stocks today as Southbound trading accounted for 14% of Hong Kong turnover.

A-Share Update

Shanghai and Shenzhen bounced around the room to close +0.63% and -0.03% at 3,550 and 2,421, respectively. Volume was off -7.79% from yesterday, which is still +36% above the 1-year average. The 513 Mainland Chinese stocks within the MSCI China All Shares Index gained +1.03% led by health care +2.12%, materials +1.87%, financials +1.74%, utilities +1.64%, staples +1.51%, real estate +1.09%, energy +1.04% while tech -0.98% and discretionary -0.2%. Northbound Stock Connect volumes were high as foreign investors bought $36 million worth of Mainland stocks and Northbound Connect trading accounted for 6% of Mainland turnover.

Last Night’s Exchange Rates & Yields

  • CNY/USD 6.46 versus 6.46 yesterday
  • CNY/EUR 7.95 versus 7.92 yesterday
  • Yield on 1-Day Government Bond 0.54% versus 0.65% yesterday
  • Yield on 10-Year Government Bond 3.13% versus 3.13% yesterday
  • Yield on 10-Year China Development Bank Bond 3.52% versus 3.53% yesterday