Daily Posts

Growth to Value Rotation Goes Global

Key News

Asian equities were mixed overnight as value outperformed growth in the region following yesterday’s US tech wreck as Japan, India and SE Asia managed gains while Hong Kong, China, Taiwan, and South Korea equity markets were off.

The Hang Seng Index was hit hard, falling -1.64% on multiple concerns, as evidenced by the broader Hang Seng Composite, which registered 371 decliners to 111 advancers. Hong Kong volume increased 31% from yesterday, which is only 93% of the 1-year average. Hong Kong is tightening coronavirus restrictions including banning inbound flights, curtailing hours for restaurants, bars, and gyms.

Tencent, -4.31% overnight, is curtailing its stake in Sea Ltd (SE US) and has sent investors liquidating all securities owned by the company including Meituan -11.16%, Kuaishou -7.53%, and HK -7.16%.  I disagree with this view as is a very mature company, i.e. profitable, while the Sea position was trimmed from 21% to 18%. Some brokers speculated that investors may have raised cash from other China internet stocks in order to participate in the purchase of Tencent’s Sea share sale. Coincidentally, I read a bond analyst’s report on Tencent. Bloomberg Intelligence analyst Robert Schiffman wrote “A sizeable revenue base that we expect to top $90 billion in 2021 (almost double 2018 levels), coupled with stable margins, may drive EBITDA above $31 billion… With significant free-cash-flow generation, cash of $39.5 billion, and a portfolio of investments growing to $224 billion, financial flexibility has never been greater.” He goes on to note that “Tencent’s credit curves all trade near or above par,” meaning investors have no doubt the company will be able to pay. This represents quite a remarkable disparity between the views of bond investors and equity investors.  

Tencent, Alibaba, and Bilibili were fined RMB 500k ($78k) for previous M&A failures under the new anti-monopoly law though I don’t believe this was a factor. Yesterday’s late afternoon SEC filing from Charlie Munger indicated that he doubled his Alibaba position in Q4 2021 and didn’t spare Alibaba HK -2.05%.  Energy and financials were the only positive sectors +1.9% and +1.08%. China Mobile’s Shanghai IPO gained +0.52% on heavy volume while the company’s Hong Kong share class gained +3.33% as proceeds of the Shanghai IPO will be used to buy the Hong Kong share class. Mainland investors were net buyers of Tencent and Meituan overnight.

The Mainland market was not immune to the poor sentiment in Hong Kong and growth to value rotation as Shanghai -1.02%, Shenzhen -1.76%, and STAR Board -2.32% as volume increased +1.48% from yesterday which is 123% of the 1-year average. Eerily similar to Hong Kong, real estate and financials were the only positive sectors +1.74% and +0.89% as decliners outpaced advancers 3 to 1.  Growth sectors were hit including the cleantech ecosystem including EV, lithium, wind, and solar along with semiconductors though it was a fairly broad decline. Large caps did hold up better than small caps.  

Today’s Wall Street Journal has an editorial on US tariffs making home appliances expensive for US consumers. Overnight, Chinese home appliance makers rose, including Gree, which gained +3.91% on reduced tariffs due to Asia’s Regional Comprehensive Economic Partnership (RCEP) trade deal.  Northbound Stock Connect volumes were moderate as foreign investors bought $478mm of Mainland stocks today. Interesting that Chinese Treasury bonds were off overnight while the currency was basically flat versus the US $ and copper rallied a touch.

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6.37 versus 6.38 yesterday
  • CNY/EUR 7.21 versus 7.19 yesterday
  • Yield on 10-Year Government Bond 2.80% versus 2.79% yesterday
  • Yield on 10-Year China Development Bank Bond 3.08% versus 3.08% yesterday
  • Copper Price +0.64%