Week in Review
- Hong Kong and US-listed China stocks sold off on Monday in reaction to the conclusion of China’s 20th Party Congress due to concerns that new party leaders represent a concentration of power and would take longer than anticipated to relax China’s Zero COVID policy. The market’s reaction was surprising to us, as we already knew President Xi’s allies would be promoted to key roles, and was partially due to forced selling from an ETF provider and the warrant/structured product market.
- China stocks rebounded sharply on Tuesday and Wednesday, nearly completely reversing course from Monday’s decline as buyers with a more positive view stepped in, and short covering ensued.
- Early pre-sale commitments for Alibaba’s Singles Day event came out this week, including the opportunity to purchase a Tesla with a 24-month interest-free loan.
- Xi and Biden are expected to meet at the G-20 summit next month following positive comments from both leaders on Thursday.
Friday’s Key News
Asian equities ended the week mostly to the downside though India, Singapore, Thailand, and the Philippines managed gains. Mainland China and Hong Kong ended an off week down on little news. Yes, there were 214 new covid cases in China yesterday, though Hong Kong’s reopening continues despite 5,000 daily cases. Today’s price action is the reaction to the consolidation of power by President Xi and the promotion of allies to key roles at the 20th Party Congress, which concluded last weekend.
Northbound Stock Connect trading indicated a foreign outflow of -$280 million today, bringing the weekly outflow to -$1.7 billion. While foreign investors appear to be sellers, Chinese investors are buying Hong Kong stocks with $545 million worth of net buying today, especially in Tencent via Southbound Stock Connect. For the week, Chinese investors have bought $3.6 billion worth of Hong Kong stocks.
Internet stocks were hit harder than the broader market overnight as Hong Kong’s most heavily traded stocks by value were Tencent, which fell -5.82%, Meituan, which fell -7.59%, and Alibaba HK, which fell -4.78%. Short selling turnover increased +19.48% from yesterday as 30% of Meituan’s trading was short turnover, 20% of Alibaba’s, 30% of JD.com’s, and 6% of Tencent’s. We need catalysts to bring buyers back into the market. A resolution to the Holding Foreign Companies Accountable Act (HFCAA) would be a significant step though investors do not seem to understand that China’s government is back to business following the conclusion of the Party Congress. We also have Alibaba’s Singles Day celebration kicking off and the company announcing a partnership in Brazil. The market appears to have completely forgotten Tuesday’s announcement from financial regulators, in which they pledged to support the economy. Hopefully, we see more releases on efforts to bolster the economy. Weak US tech earnings likely contributed to the price action too. We also had the US dollar strengthen overnight as the Asia Dollar Index fell and China’s renminbi (CNY) depreciated -0.36% versus the US dollar to 7.25.
Below is an answer to a question we received during yesterday’s webinar: Are EM & China simply out of favor, and, if so, will this last?
Since the Global Financial Crisis low on 3/9/2009 to Wednesday’s close, the S&P 500 has gained +641%,
This has led many to say China and/or Emerging Markets are “out of favor”. The issue is the sector orientation of China and the Emerging Market index. At year-end 2011, nearly 50% of MSCI China was in just two sectors: energy and financials. MSCI EM had 49% in three sectors: financials, materials, and energy. The two indexes were heavily weighted to value sectors during a decade of growth outperformance.
How did tech, i.e. growth, do over the same time period?
The MSCI EM Tech Index has gained +637% and the MSCI China Tech Index has gained +1,661%! The tech sector was 12% of MSCI EM and 2% of MSCI China in 2011! The issue is not EM and China being out of favor versus US equities but, rather, the sector orientation of representative indexes.
The Hang Seng and Hang Seng Tech indexes fell -3.66% and -5.56%, respectively, on volume that increased +1.37% from yesterday, which is 101% of the 1-year average. 30 stocks advanced, while 474 stocks declined. Main Board short turnover increased +19.48% from yesterday, which is 113% of the 1-year average, as 19% of total turnover was short. Value factors “outperformed” growth factors today as large caps outperformed small caps. All sectors were down, with financials down the least -1.77%, and discretionary down the most -5.96%. Even all sub-sectors were negative, with banks down the least -1.23%, while auto, software, and retailers were down the most. Northbound Stock Connect volumes were high/moderate as Mainland investors bought $545 million worth of Hong Kong stocks as Tencent saw moderate/light net buying, Wuxi Biologics saw moderate net buying, Meituan, and BYD saw small net buying, while Kuaishou saw small net selling.
Shanghai, Shenzhen, and the STAR Board fell -2.25%, -3.40%, and -1.11%, respectively, on volume that fell -1.49% from yesterday, which is 93% of the 1-year average. 467 stocks advanced, while 4,214 stocks declined. Value factors “outperformed” growth factors as large caps outpaced small caps. All sectors were negative, with energy down the least, -0.57%, while materials were the worst, falling -4.21%. All subsectors were down, as precious metals fell -0.23% and food stocks fell -5.42%. Northbound Stock Connect volumes were moderate/high as foreign investors sold -$280 million worth of Mainland stocks today. Treasury bonds rallied as the 10 Year Treasury Yield is now 2.67%, CNY was off -0.36% versus the US dollar to 7.25, and copper was flat.
Last Night’s Exchange Rates, Prices, & Yields
- CNY per USD 7.25 versus 7.23 yesterday
- CNY per EUR 7.23 versus 7.23 yesterday
- Yield on 1-Day Government Bond 1.30% versus 1.31% yesterday
- Yield on 10-Year Government Bond 2.67% versus 2.70% yesterday
- Yield on 10-Year China Development Bank Bond 2.87% versus 2.89% yesterday
- Copper Price unchanged