Week in Review

• Hong Kong returned from its holiday in good spirits as the Hang Seng Index gained +5.9% on Wednesday on multiple catalysts, including Hong Kong reopening for unrestricted travel, the US dollar potentially peaking, and the 20^th National Party Congress, which will start on the 16^th.
• Travel and real estate stocks have led gains this week in Hong Kong as investors appear to expect a recovery in both spaces.
• Mainland China’s stock and bond markets have been closed this week for the Golden Week national holiday and will reopen on Monday.

Key News

Asian equities were off overnight on light volumes as Fed tightening fears reignited though the region posted gains for the week.  The consensus is that the Fed will raise interest rates until something breaks, i.e. a financial/economic crisis occurs. Sounds like a great game plan…

Today was the last day of Mainland China’s Golden Week holiday, while Pakistan was closed for Mawlid-al-Nabi, the spiritual day on which Muslims celebrate the birth of the Prophet Muhammed. The US dollar was a little weaker this morning though the Asia currency index and China’s offshore renminbi were off versus the US dollar.

It was a very light-volume day in Hong Kong, with China still on holiday, meaning no support from Mainland investors. Hong Kong volume was only 45% of the 1-year average, though the Main Board short selling increased overnight to 59% of the 1-year average as 22% of Main Board volume was short. JD.com HK had 45% of volume short, Alibaba had 20% short, Meituan had 35% short, and Tencent had 9% short. Surprisingly, the Hong Kong Stock Exchange and/or Hong Kong regulators have not put short-selling limits in place, which Taiwan did earlier this week. The level of short-selling is embarrassing! Internet stocks were off though Li Auto HK fell -14.75%, dragging Nio -10.47%, and Xpeng -6.04%. Chatter ranges from weak Golden Week auto sales to a major shareholder selling to leveraged investors blowing up.   

After the US close yesterday, MSCI announced that it would speak to its clients about its China A Share inclusion. Remember that MSCI added 20% of the potential weight of MSCI’s definition of China A shares in 2018 and 2019. MSCI stopped the inclusion due to certain characteristics of Mainland A shares, which include same-day settlement (the day you buy a stock, you deliver cash), omnibus trading (trade A shares for multiple trading accounts), the lack of market holiday alignment between Hong Kong and Mainland China, and lack of an MSCI China A futures. Three issues have been resolved as MSCI China A50 futures launched last year in Hong Kong. In August, the Hong Kong Exchange announced they would amend the holiday schedule to eliminate 13 non-trading days, and omnibus trading has been resolved. Yes, T+0 trading is a big issue, especially for passive investors. The reason is that on index rebalance day, you need to deliver cash on the trade date for Chinese A shares, but you do not receive the cash from selling non-Chinese stocks for two days. These are truly the only remaining issues preventing MSCI from moving forward with inclusion, but political considerations may also be delaying further inclusion announcements. We will watch this development closely.          

The Hang Seng and Hang Seng Tech indexes fell -1.51% and -3.3%, respectively, on volume that fell -8.79% from yesterday, which is only 45% of the 1-year average. 57 stocks advanced, while 446 stocks fell. Main Board short turnover increased +6.78% from yesterday, which is 59% of the 1-year average, as 22% of the volume was short. Value factors “outperformed” (fell less) growth factors as large caps “outperformed” small caps. All sectors were negative as energy fell -0.65%, staples fell -0.82%, and financials fell -1.1%, while real estate fell -3.3%, materials fell -2.98%, and tech fell -2.69%. The top-performing subsectors were semiconductors and Macau casino stocks, while autos, software, and healthcare equipment were among the worst. Southbound Stock Connect was closed today.

Shanghai, Shenzhen, and the STAR Board reopen on Monday.

Last Night's Exchange Rates, Prices, & Yields

Mainland China's currency, commodity, and fixed income markets were closed overnight.