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Mainland Markets Rise As Hong Kong Shorts Press Their Bets

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Key News

Asian equities had a rough start to the week except for Mainland China, which outperformed the region while Japan was closed for the “Respect for the Aged Day” holiday.

Multiple central banks will meet this week as investors look for interest rate hike guidance. US and China diplomatic relations continued to stabilize as National Security Advisor Jake Sullivan and Foreign Minister Wang met in Malta as steps are taken to arrange for a Biden-Xi meeting at the APEC conference in San Francisco in November.

Today is a good example of our onshore China (predominantly owned by investors in China) versus offshore China (predominantly owned by foreign investors) thesis as both markets traded in opposite directions overnight. Today’s market action in Hong Kong is somewhat surprising as early figures on domestic travel before China’s weeklong holiday appear strong. Meanwhile, there are signs that the economy has stabilized, if not bottomed out, as policy reforms start to take effect.

Western media headlines point to poor real estate news as Evergrande’s wealth unit employees were apparently arrested, a story that came out overnight alongside multiple front page headline on China’s distressed real estate developers. I am still looking for more details on the circumstances surrounding this action.

Western media is rooting for a real estate collapse, though, remarkably, China has not had a recession in decades. So, why did Mainland real estate fall -0.68% while Hong Kong real estate fell -2.40%?  Simply put, foreign investors “freaked out” while Mainland investors shrugged their shoulders. The issue for Hong Kong is simply a lack of buyers, which allows short sellers to press their bets with 23% of Main Board turnover being short turnover. Mainland regulators have limited supply (IPOs and insider sales) while trying to increase demand (encourage dividends and buybacks). Hong Kong should do the same, though I would recommend they look at short selling volumes, which are abnormally high. 

Kweichow Moutai gained +2.64% to become the largest holding in MSCI China A indices, following its recent Moutai-infused coffee collaboration. The premium baijiu liquor company also rolled out a Moutai-infused chocolate bar in partnership with Dove Chocolate. It is somewhat ironic that foreign investors have been net sellers of Kweichow Moutai over the past month.

Hong Kong-listed internet stocks were off despite Tencent’s continued stock buyback. Alibaba was off in Hong Kong despite growing their Turkey business and Ant Group taking a stake in South Korean mobile payment provider Toss Payments.

Mainland investors bought a healthy $1.13 billion worth of Hong Kong stocks. The HK Tracker ETF saw a very strong net inflow as somebody is buying the offshore dip. 

It is remarkable to me how little is written about the MSCI All Country World ex-US’ return of only +228% and the MSCI Emerging Market’s return of +204% since the Global Financial Crisis (GFC) low (all returns in US dollars). Sector weights, and, more to the point, the lack of growth sectors and overweight of value sectors, has created a large disparity between the US market and non-US markets. For instance, the Euro Stoxx 50 Index has returned only +249% since the GFC low. But, do we read about Europe being un-investable? Not really. Maybe the issue is the benchmark, which has only four tech stocks and only one communication stock! As we’ve written in the past, both MSCI Emerging Markets and MSCI China had only 11% and 2%, respectively, in the tech sector ten years ago. Energy and financials accounted for more than 50% of the indices, which weighed on the performance.  Bad sector composition could be the root of all evil!      

The Hang Seng and Hang Seng Tech indexes fell -1.39% and -2.22%, respectively, on volume that decreased -28.43% from Friday, which is 73.9% of the 1-year average. 157 stocks advanced while 319 declined. Main Board short turnover increased +8.38% from Friday, which is 103% of the 1-year average, as 23% of turnover was short turnover. The growth factor “outperformed” (ie. fell less than) the value factor as large caps outpaced small caps. The top-performing sectors were healthcare, which gained +0.7%, utilities, which gained +0.27%, and energy, which gained +0.10%. Meanwhile, Real Estate fell -2.4%, technology fell -1.97%, and consumer discretionary fell -1.68%. Top sub-sectors were healthcare equipment, pharma and business services while semis, food and retailing were the worst.  Southbound Stock Connect volumes were moderate as mainland investors buying $1.113B of HK listed ETFs and stocks with the HK Tracker ETF seeing a very large net buy, China Mobile, Innovent and SMIC small net buys.

Shanghai, Shenzhen and STAR Board closed +0.26%, +0.54% and -0.84% on volume -3.04% from Friday which is 80% of the 1-year average. 3,233 stocks advanced while 1,458 declined.  The growth factor outperformed the value factor as small caps outpaced large caps. The top-performing sectors were Consumer Discretionary, which gained +1.77%, Consumer Staples, which gained +1.12%, and Healthcare, which gained +0.91%. Meanwhile, Utilities fell -0.75%, Real Estate fell -0.68%, and Technology fell -0.66%. The top-performing subsectors were restaurants, auto parts, and the auto industry. Meanwhile, telecom, trade industry, and energy equipment were among the worst-performing. Northbound Stock Connect volumes were moderate/light as foreign investors bought a net $387 million worth of Mainland stocks as CTG Duty Free, BYD, and Kweichow Moutai were all small/moderate net buys, while CATL, Wuxi AppTec, and Citic were small net sells. CNY and the Asia dollar index fell versus the US dollar. Treasury bonds sold off.

Last Night's Performance

Last Night’s Exchange Rates, Prices, & Yields

  • CNY per USD 7.30 versus 7.28 Friday
  • CNY per EUR 7.78 versus 7.76 Friday
  • Yield on 1-Day Government Bond 1.60% versus 1.45% Friday
  • Yield on 10-Year Government Bond 2.65% versus 2.64% Friday
  • Yield on 10-Year China Development Bank Bond 2.76% versus 2.76% Friday
  • Copper Price -0.42%
  • Steel Price +0.10%