Growth Stocks Rebound on Good, Not Great Economic Release
Economic Data Release Overview
Takeaway: The 10 am local time-release pushed equities higher as it was largely in line with expectations, highlighting the continued economic expansion. The good, but not great, release included retail sales coming in lighter than expected though this was largely driven by March’s outsized gain due to the comparison with March 2020, the depths of China’s quarantine. Markets cheered the good but not great news as it should keep policymakers from removing stimulus measures too quickly. Online retail sales grew +27.6% year to date (YTD), while jewelry sales rose +48.3%, as highlighted by our friends at Jing Daily who track Chinese luxury goods consumption, restaurant spending grew +46.4%, and construction materials grew +30.8%, while office supplies increased only 6.7%.
Asian equities had a mixed day following the US’ strong move Friday as China, India, and Singapore outperformed while Taiwan was hit, falling nearly -3% on rising coronavirus cases, and Indonesia was off -1.76%. China shrugged off reports of isolated coronavirus cases as Premier Li’s comments on the importance of technology lifted sentiment around growth stocks including electric vehicles and STAR Board stocks.
A prominent Chinese private equity investor alleged that small-cap companies were seeing price manipulation, leading to weakness in the space. MSCI’s definition of Mainland Chinese stocks includes large and mid-cap stocks, both of which outperformed today. MSCI’s definition lacks exposure to small caps.
Recent census data showed that the percentage of China’s population over the age of 60 is now at a sky-high 18.7%. The census is likely behind the advertising campaign for two Mainland Chinese ETFs focused on medical and biotech stocks. China’s new education rules have been released, as noted in a Wall Street Journal article. I am still getting my arms around the news and implications so there will be more commentary to come.
The Shanghai Composite Index bounced higher off the 200-day moving average, which has been a support level for the last two months. The Hang Seng Index’s chart looks a little choppier in comparison. Sell-side analyst reports focused on sum of the parts (SOTP) analyses, which is why many have maintained their buy ratings on Chinese internet companies though several have reduced their price targets following the recent correction.
Walvax Biotech gained +2.64%. Foreign investors bought $400 million worth of Mainland stocks as Northbound trading accounted for 5.8% of Mainland turnover. Bonds eased, CNY was steady at 6.44, and copper was off a touch.
Last week I recommended Matt Ridley’s excellent book “How Innovation Works,” which was a recommendation from an Australian contact. The book dispels the inaccurate view of geniuses having a eureka moment and demonstrates that innovation occurs incrementally via trial and error and is usually marked by multiple people working on the same idea simultaneously either through cooperation, stealing, or coincidence. The end of the book looks at threats to innovation with government regulation receiving outsized attention. Incumbent companies do not like innovation as they benefit from the status quo and utilize lobbying to create regulatory hurdles for new players. Ridley states that none of the 100 largest publicly traded European companies were founded less than 40 years ago, a prime example of the regulatory and bureaucratic effect on innovation. China is listed as a place where technology innovation is occurring at a rapid pace driven by a strong work ethic and “leapfrogging into the future” driven by consumer adoption of technologies provided by private companies. This is a lot to take in if you think about the sheer size and continued growth in the size of the US government with the likelihood of higher taxes and more regulation coming. This is also why the current regulation of Chinese internet stocks will not kill the “golden goose” in my opinion. These companies are comprised of highly educated, well-paid employees who are executing on bringing consumers services they want.
JD Logistics’ May 21st Hong Kong listing is moving along with details emerging that the company will issue 609 million shares, which would raise between $3.5 to $3.9 billion based on the price range of HKD 39.36 to $43.36. There will be another 91 million shares available, if needed, via the “green shoe”.
Tencent Music Entertainment (TME US) reports after the US close today, Baidu (BIDU US) reports Tuesday morning, JD.com (JD US) Wednesday morning, and Tencent (700 HK) Thursday morning.
The Hang Seng opened higher and stayed there to close +0.59% on volume which was down -3.48% from Friday, 90% of the 1-year average. The 200 Chinese companies listed in Hong Kong and within the MSCI China All Shares Index gained +1.87% led by discretionary +3.59%, communication +2.94%, staples +2.55%, materials +2.28%, tech +2.17%, and healthcare +1.35%. Hong Kong’s most heavily traded stocks by value were Tencent, which gained +3%, Meituan, which gained +4.18%, Alibaba HK, which gained +0.39%, Xiaomi, which gained +1.16%, AIA, which gained +0.68%, JD.com HK, which fell -0.89%, Ping An Insurance, which gained +0.49%, Hong Kong Exchanges, which gained +0.63%, BYD, which gained +6.33%, and ICBC, which fell -1%. Southbound Connect volumes were light as Mainland investors bought a healthy $1.088 billion worth of Mainland stocks today as Southbound Connect trading accounted for 13.4% of Hong Kong turnover. Tencent saw outsized buying followed by Meituan.
Shanghai, Shenzhen, and the STAR Board gained +0.78%, +1.15%, and +2.18%, respectively, as volume increased +2.69%, which is 104% of the 1-year average. Breadth saw 1,137 advancers and 2,796 decliners. The 517 Mainland stocks within the MSCI China All Shares Index gained +1.56% led by materials +2.63%, discretionary +2.48%, communication +2.43%, healthcare +2.38%, staples +2.33%, industrials +2.07%, and tech +1.75%. Meanwhile, financials -0.56%. The Mainland’s most heavily traded stocks by value were broker East Money, which fell -0.23%, Kweichow Mutai, which gained +2.39%, Changan Auto, which gained +3.3% on electric vehicle plans, Wuliangye Yibin, which gained +3.55%, Fosun Pharma, which fell -0.84%, CATL, which gained +3.95%, COSCO Shipping, which gained +10.01%, Sany Heavy Industry, which gained +2.72%, and BYD, which gained +4.07%.
Last Night’s Exchange Rates, Prices, & Yields
- CNY/USD 6.44 versus 6.44 yesterday
- CNY/EUR 7.82 versus 7.81 yesterday
- Yield on 1-Day Government Bond 1.70% versus 1.56% Friday
- Yield on 10-Year Government Bond 3.15% versus 3.14% Friday
- Yield on 10-Year China Development Bank Bond 3.54% versus 3.52% Friday
- Copper Price -0.16% overnight