Xiaomi Wins Legal Challenge, MSCI Rebalances EM Index
April Economic Release Overview
Takeaway: It is very important to remember that this data came out after the market’s close today. You can see the data came in light versus expectations and May’s numbers. I suspect the release will give policymakers pause on tightening, though the PBOC has reiterated several times that it will make “no sharp turns,” removing pandemic stimulus gradually. One broker’s initial thoughts were that April tax payments might have been a factor in the release.
Asian equities were a sea of red as Taiwan was hammered -4.11%, though off its intra-day lows of -8.55%, as Taiwanese industrials fell -7.44%, materials fell -6.72%, and energy dropped -6.05% while index heavyweight Taiwan Semiconductor Manufacturing was off -1.93%. Japan and South Korea were hit hard as well, down more than 1%. Meanwhile, Hong Kong and China outperformed.
Goldman Sachs put out a positive research piece yesterday on US-listed Chinese internet and technology stocks, saying the recent correction offered a buying opportunity. I could not agree more as internet plays rebounded strongly overnight in Hong Kong.
Xiaomi won its legal challenge against the Department of Defense, successfully disputing its inclusion in the Executive Order investment ban. If you cannot afford an iPhone or a Samsung Galaxy, Xiaomi makes a quality low-cost alternative. FTSE Russell dropped Xiaomi from its indexes so index and ETF managers will have to buy it back. I suspect that other Chinese companies will follow Xiaomi’s lead in challenging allegations that they have ties to China’s military.
Media outlets in Mainland China were abuzz about the potential launch of property taxes, which China does not currently have. The move would be a strong way to discourage over-investment in property. As a result, real estate was the worst performer in both Hong Kong and China.
Yesterday, our friends at Jing Daily posted their Index Moves monthly overview of the China Global Luxury market. They noted the Jing Daily KraneShares China Global Luxury Index reached its highest level ever. Read the note here.
Meanwhile, afterschool and weekend tutoring hours will be curtailed by new regulations. However, the measures appear to be aimed at offline schools, rather than online tutoring. According to Reuters, parents spent $120 billion on tutoring in 2019 due to China’s rigorous school testing regime.
Reuters is reporting that Naspers is trying to close its current discount to NAV through a share swap with its Amsterdam-listed tech investment spinoff Prosus. Naspers bought 1/3 of Tencent back in 2001 in arguably the greatest trade ever as their $34 million investment grew to over $200 billion.
BlackRock received a license to manage individuals’ wealth assets in China. Wealth management in China is a burgeoning industry and one that is increasingly populated by the American investment managers that we know so well. We will be covering the industry as it develops.
MSCI released its Pro-forma for the June 1st Semi-Annual Index Review last night, which will require passive index fund and ETF managers to trade at the close on Monday, May 31st. MSCI’s Global Investable Market Index Methodology (GIMI) is arguably the most important financial book ever written as it dictates how $14.51 trillion of active and passive assets is invested. The number of Emerging Market (EM) stocks will increase from 1,391 to 1,425, driven by 84 additions and 50 deletions. China’s weight in the MSCI Emerging Markets Index will increase from 37.7% to 38.4%, driven by 60 additions and 21 deletions. China will account for 748 of 1,160 stocks within EM while South Korea has 106 stocks, India has 101 stocks, and Taiwan has 87. EM Asia is 79.8% versus EM Europe/Middle East/Africa at 12.8% (163 stocks) and EM Latin America at 7.4% (102 stocks).
Today, we will find out whether MSCI will transition from Alibaba’s US listing to its Hong Kong listing. MSCI’s index methodology would say that they will, though they asked their clients (including ourselves) for their thoughts on the issue. It is feasible that they could delay the decision as investors quickly call Citibank, Alibaba’s ADR custodian, to inquire as to how much it costs to convert the US ADR to the Hong Kong listing, which can be done overnight. Regardless of the decision, I find it a depressing event as the US stock exchanges, trading desks, investment bankers, accountants, lawyers etc. will, in the long run, be hurt as volumes and IPOs migrate to Hong Kong. This is not the end of the world, though an unfortunate consequence of political rhetoric, which is why Alibaba relisted in Hong Kong in November 2019. Alibaba’s revenue nearly doubled from 2017 to 2019, though the stock was flat as its US shares were used as a trade war proxy despite the company having nothing to do with the trade war. I suspect JD.com and NetEase, which relisted in Hong Kong during June 2020, will see their US shares converted to Hong Kong shares in September’s quarterly index review. FTSE Russell indexes have already migrated to Alibaba’s Hong Kong share class, which required the second-largest EM ETF globally to convert 1.7 million shares from the US to Hong Kong.
The Hang Seng bounced around the room closing +0.78% as volume declined -14.73% from yesterday, which is a touch above the 1-year average. The 200 Chinese companies listed in Hong Kong and within the MSCI China All Shares Index gained +1.15% led by tech +3.34%, communication +2.43%, discretionary +2.11%, and healthcare +1.59%. Meanwhile, real estate -1.3% and industrials -1.15%. Hong Kong’s most heavily traded stocks by value were Tencent, which gained +2.4%, Meituan, which gained +2.49%, Xiaomi, which gained +6.1%, Alibaba HK, which gained +6.07%, Ping An, which fell -0.86%, BYD, which gained +4.86%, AIA, which fell -1.06%, Hong Kong Exchanges, which gained +0.68%, SMIC, which gained +3.48%, and Sunny Optical, which gained +1.78% on strong April shipments. Southbound Stock Connect volumes were light as Mainland investors bought a healthy $1.263 billion worth of Hong Kong stocks today, led by buying in Tencent, Meituan, and Xiaomi as Southbound Connect trading accounted for 10.8% of Hong Kong turnover. CNY eased versus the US dollar, bonds were flat, and copper rallied.
Shanghai, Shenzhen, and the STAR Board gained +0.61%, +0.88%, and +1.02%, respectively, as volume declined -9.71% from yesterday, placing it back below the 1-year average. There were 2,453 advancing stocks and 1,372 declining stocks. The 517 Mainland stocks within the MSCI China All Shares Index gained +0.29% led by communication +1.54%, healthcare +1.5% and energy +1.31% while real estate -1.49% and utilities -0.83%. The Mainland’s most heavily traded stocks by volume were Kweichow Moutai, which gained +1.28%, BYD, which gained +4.89%, Fosun Pharma, which gained +0.11%, Sokon Industrial, which gained +3.27%, Walvax Biotech, which ripped +15.32%, CATL, which fell -1.39%, COSCO Shipping, which gained +2.42%, Tianqi Lithium, which gained +3.36%, BAIC BluePark New Energy, which gained +9.99%, and Changan Auto, which gained +10%. Northbound Stock Connect volumes were moderate as foreign investors sold -$66 million worth of Mainland stocks as Northbound trading accounted for 5.3% of Mainland turnover.
Last Night’s Exchange Rates, Prices, & Yields
- CNY/USD 6.45 versus 6.43 yesterday
- CNY/EUR 7.80 versus 7.82 yesterday
- Yield on 1-Day Government Bond 1.42% versus 1.32% yesterday
- Yield on 10-Year Government Bond 3.13% versus 3.14% yesterday
- Yield on 10-Year China Development Bank Bond 3.54% versus 3.52% yesterday
- Copper Price +0.67% overnight