Alibaba & Tencent Tape Bomb Bought In Size
I’m sure like many of you, last night’s dinner conversation with the kids was a difficult one trying to explain the events in Washington DC. I’m open to suggestions on how to explain yesterday.
Separate from the events at the capital, we had the news that Tencent and Alibaba were under review to be banned. My take is, if you take a step back, you have to go back to early November when the Department of Defense Secretary Mark Esper was fired. He was replaced with a loyalist who would toe the line. At the end of November, several Executive Orders aimed at Chinese securities were released originating not from the Treasury Department, but from the Department of Defense. Unlike in a court of law, an Executive Order assumes guilt without any evidence. TikTok’s Generation Z users successfully sued in court, blocking the ban due to the lack of proof for the allegations. Thus far, there have been no legal challenges to the Executive Order, which is a shame.
Yesterday, as the Capitol Building was being overrun, the Department of Defense, which allegedly declined to send the National Guard to prevent the defacing of our capitol, decided to leak to the Wall Street Journal that they are considering banning US investors in Alibaba and Tencent. The tape bomb promptly sent the securities down, which extended overnight in Hong Kong trading. Let’s be clear: The two companies are well respected and widely held by the global asset management community. They have also generated significant gains for investors. These companies are unlikely to be banned because there is no proof of wrongdoing. Investors, if not the companies themselves, may sue to stop this nonsense.
Yes, Tencent and Alibaba Hong Kong fell overnight -4.69% and -3.91% as the headlines shook out weak hands. Just yesterday I mentioned that Southbound Connect, the trading venue for Mainland investors accessing Hong Kong stocks, is a great indicator to track. Yesterday, Mainland investors bought $601 million worth of Tencent stock via Southbound Stock Connect. That is the net of sales! We have repeatedly recommended investors watch CNH, China’s currency price during US hours, to gauge the seriousness of a headline. CNH was off a touch intra-day yesterday but no more than other currencies as the US dollar rallied on the Washington DC scenes. CNH told us we might want to be buying not selling! It is a shame to watch a behavioral finance study real-time knowing the harm investors did to themselves.
Asian equities had a strong day on strong volume, though Hong Kong and India were off. Hong Kong was dragged down by the growth names with the Hang Seng Index falling -0.52%, and the Hong Kong stocks within the MSCI China All Shares Index were off -1.43%. Hong Kong volume leaders were Tencent, which fell -4.69%, China Mobile, which dropped -7.18%, Xiaomi, which was off -5.06%, Alibaba Hong Kong, which fell -3.91%, Meituan, which dropped -0.65%, Semiconductor Manufacturing, which gained +2.73%, e-cigarette Smoore International, which fell -7.1%, Geely Auto, which rose +5.1%, HSBC, which gained +4.58%, Ping An, which was up +1.23%, and AIA, which rose +2.1%. Remember that HSBC and AIA are not considered Chinese companies, so their outperformance isn’t in MSCI China All Shares.
I’m a little surprised that health care was off, given Japan’s coronavirus flare up and a few pockets in Mainland China. Mainland China did very well as Shanghai & Shenzhen were up +0.71% and +0.21%, respectively. The Mainland stocks within the MSCI China All Shares Index were up +1.41% as large caps outpaced mid and small caps. It is interesting since there were nearly 3 declining stocks in China versus advancers, though the large caps pulled up the indexes. Foreign investors bought $504mm of Mainland stocks today. Bonds and CNY were basically flat while copper rallied.
There is chatter that Baidu is starting the Hong Kong relisting process.
There have been questions on whether or not the three Chinese telecom ADRs will trade on the pink sheets once delisted. SMIC, which delisted itself from the NYSE a year ago, is having its pink sheet listing removed next Monday, which is not a good sign for investors who aren’t aware of the three telecom names being delisted.
The chairman of a financial firm in China was convicted on bribery charges and sentenced to death. Not a typo. Can you imagine if the US financial industry had that regulation? Straight and narrow people!
There are reports that JP Morgan is pursuing a wealth management venture with China Merchants Bank.
The Hang Seng lost -0.52%/-143 index points closing at 27,548. Volume was up +4.45% from yesterday, which is 74% above the 1-year average while breadth had 15 advancers and 33 decliners. The 200 stocks within the MSCI China All Shares Index were off -1.43%, with utilities up +2.83%, materials +2.14%, and financials +1.41%, while communication fell -4.9%, tech -2.53%, staples -1.88%, and healthcare -1.68%.
Shanghai & Shenzhen gained +0.71% and +0.21% closing at 3,576 and 2,426. Volume was up +4% from yesterday, which is 42% above the 1-year average while breadth saw 761 advancers and 3,105 decliners. The 513 Mainland Chinese stocks gained +1.41%, led by materials +3.59%, discretionary +3.09%, industrials +2.18%, energy +1.66%, staples +1.55%, and financials +1.03%, while communication fell -2.08% and real estate -1.03%. Northbound Stock Connect volumes were high as foreign investors bought $504mm of Mainland stocks.
Last Night’s Exchange Rates & Yields
- CNY/USD 6.48 versus 6.46 yesterday
- CNY/EUR 7.94 versus 7.96 yesterday
- Yield on 1-Day Government Bond 0.85% versus 0.54% yesterday
- Yield on 10-Year Government Bond 3.13% versus 3.13% yesterday
- Yield on 10-Year China Development Bank Bond 3.53% versus 3.52% yesterday