Key News

Asian equities had a mixed day following the selloff in US equities yesterday though China and Hong Kong were standouts. Hong Kong would have had an off day if volume leader Tencent had not risen +5.23% and thereby hold up the Hang Seng Index. Tencent was up +158 index points as June online gaming data showed Tencent dominated the market. Meanwhile, fellow Hong Kong-listed online gaming company Kingsoft popped +11.59%. Today was all about the galloping growth names, which dominated the most heavily traded list as Semiconductor Manufacturing +9.17%, Alibaba HK +2.32%, and Meituan Dianping +8%. Further down the volume list were JD.com HK +2.31% and NetEase HK +3.24%.

Reports that US officials may target Hong Kong’s USD peg likely put a damper on Hong Kong’s performance. Several brokers cited the news as a key reason for HSBC’s drop of -4.27%. This is another “more bark than bite” situation as breaking the peg would send global markets down on an elevator. Weaponizing the dollar would have vast implications far beyond Hong Kong. I am actually surprised the media continues to fall for this distraction technique. The Roman emperors gave bread to the masses while the modern equivalent is throwing China under the bus, I guess.

Nonetheless, Mainland investors were not scared away by the news as they bought $1.135 billion worth of Hong Kong stocks today via the Southbound Stock Connect trading venue. I cannot confirm whether this was a record, but it was 2X the biggest day I can recall. Mainland equities were bouncing around until a Mainland media source reported that two Chinese banks would increase their equity exposure by $100B. Separately, there was news that mainland investors were increasing their equity allocations. Brokers were market leaders as mainland volumes were 2X the 1-year average. Northbound Stock Connect volumes were high but a broker noted that a Bloomberg article on potential margin increases tempered their enthusiasm. Margin levels are nowhere near the levels reached in 2015.

Reuters is reporting that Alibaba’s Ant Group, formerly known as Ant Financial, will go public this year in Hong Kong. According to the article, the company aiming for a $200B valuation after selling between 5% to 10% of its stock. The common narrative will be that Jack Ma stole Ant Financial from Alibaba, but here is the real story. After its founding in the late 1990s, Alibaba was struggling mightily. Ebay bought a local competitor, which introduced the young startup to a fierce rival. After investing in Alibaba, Softbank introduced Jack Ma to Jerry Yang, the founder and CEO of Yahoo. The two struck up a friendship which led to Yahoo providing Alibaba technology in exchange for a stake in the company. This technology helped Alibaba put Ebay out of business in China. Over the years, as Alibaba grew, Yahoo’s business went south and the Yahoo board fired Yang in the early 2010s. Ma asked Yahoo if he could buy their stake as Yang was replaced on Alibaba’s board. Yahoo had little value other than its Alibaba stake so they refused. Ma’s belief was that he had a deal with Yang and not Yahoo. With Yang out of the picture, he thought Yahoo did not have a place on Alibaba’s board. He decided that the best way to get Yahoo out was to do something to hurt them. So, he spun off Alibaba’s mobile payment unit Ant Financial. Yahoo screamed bloody murder, but still refused to sell its stake in the company. This tale is told in Duncan Clark’s book “Alibaba: The House that Jack Ma Built” which I highly recommend.  As a future shareholder, it is very exciting to me that Ant may be going public. At the same time, the decision to list in Hong Kong represents a blow to US exchanges and investment banks.

A broker has noted the divergence between Asian equities outperformance and continued investor outflows. The broker believes that market dips will be bought as investors scramble for exposure. We have been banging the drum on the home bias of US investors as they have redeemed $1.2B worth of US-listed Chinese equity ETFs, which represents 7.23% of assets year to date. This is despite the median China equity ETF is up +13.8% versus the S&P 500’s YTD decline of -2.65%. For broad EM, things don’t look much better as investors have redeemed $10B of US listed equity EM ETFs, which represents -5.95% of assets. The three largest EM ETFs have lost $13.981B YTD.  

One interesting drama in Hong Kong last night involved China Feihe (6186 HK), a dairy company. A short seller released a report mid-morning accusing the firm of fraud, which led to a collapse of -8.47%. The company denied the claim and then announced that revenue in the first half of 2020 was +40%. The stock did a U-turn to close +7.21%. I believe short sellers have a place in the market. If a stock analyst at an investment bank took on a long position in a stock and then told clients they were going to upgrade the stock, they would go to jail. By comparison, short sellers can amass a position and then release a report. My question is: why the double standard?

H-Share Update

The Hang Seng bounced around the room to close +0.59%/+153 index points at 26,129. Volume declined -18% though remained at nearly 2X the 1-year average while breadth was mixed with 21 advancers and 26 decliners. Index heavyweights diverged with Tencent +5.23%/158 index points, today’s worst performer HSBC -4.27%/-97 index points, and HK Exchanges +2.93%/+38 index points. Today’s best performer was China Life, which rose +6.99%/+32 index points. China-domiciled stocks greatly outperformed Hong Kong-domiciled stocks +1.39% versus -0.34%.The Chinese companies listed in Hong Kong and within the MSCI China All Shares Index gained +2.9% with tech 6.44%, discretionary 4.77%, communication 4.48%, materials +3.32%, staples+2.41%, health care +1.98%, industrials +1.58%, financials +1.55%, utilities+0.13%, energy +0.0%, and real estate -0.57%.

Southbound Connect volumes were 2X the 1-year average as Mainland investors were net buyers of Hong Kong stocks. Volume leader Semiconductor Manufacturing was sold slightly and Tencent was bought 3 to 1. Mainland investors bought $1.135B worth of Hong Kong stocks today as Southbound Connect trading accounted for 11% of Hong Kong turnover.

A-Share Update

The Shanghai and Shenzhen went from the lower left to the upper right +1.74% and +1.88% to close at 3,403 and 2,198, respectively. Volume was off -11% but remained 2X the 1-year average while breadth was very strong with 3,036 advancers and just 688 decliners. It was a fairly uniform rally with large, mid and small caps largely in line with one another. The Mainland stocks within the MSCI China All Shares Index rose +1.82% with financials +3.06%, tech +2.74%, industrials +2.56%, materials +2.46%, communication +1.73%, real estate +0.72%, discretionary +0.68%, health care +0.44%, energy +0.36%, staples +0.32%, and utilities +0.31%.

Northbound Connect volumes were still 2X as foreign investors were net buyers of Mainland stocks though trading was mixed. Volume leaders were Kweichow Moutai, which was sold 3 to 2, Ping An Insurance, which was bought 2 to1, liquor stock Wuliangye Yibin, which was sold 2 to 1, and Gree Electric Appliances, which was bought 5 to 4.  Foreign investors bought $164mm worth of Mainland stocks today as Northbound Connect accounted for 5% of Mainland turnover.

Last Night’s Exchange Rates & Yields

• CNY/USD 7.01 versus 7.01 yesterday
• CNY/EUR 7.94 versus 7.92 yesterday
• Yield on 1-Day Government Bond 1.26% versus 1.22% yesterday
• Yield on 10-Year Government Bond 3.06% versus 3.2% yesterday
• Yield on 10-Year China Development Bank Bond 3.38% versus 3.33% yesterday