Week in Review
- Asian equities were higher this week except for Singapore, Pakistan, Malaysia, and Indonesia, as Hong Kong and Mainland China outperformed on rate cuts and new stimulus measures.
- China’s equity market surged on Tuesday as the People’s Bank of China (PBOC) announced broad rate cuts, a lowering of mortgage down payment minimums, and a special lending facility to allow financial institutions to buy stocks, among other stimulus measures.
- On Thursday, the Central Committee followed up the monetary stimulus with a variety of fiscal measures, including injecting RMB 1 trillion into the largest banks, leading to another day of significant gains for China’s equity market.
- Net Southbound Stock Connect flows to Alibaba’s Hong Kong shares have already exceeded $5 billion in less than a month since the shares were added to the mutual market access program, which is 25% of our estimate of approximately $20 billion in total inflows.
Key News
Asian equities were mixed overnight as Mainland China outperformed significantly and Hong Kong extended gains.
With this week’s stimulus rally, the Hang Seng Index is now above the S&P 500 in total return, at +22.32% versus the S&P 500’s +21.0%, so far this year. Meanwhile, the CSI Overseas China Internet Index is up +22.44% after today’s open in US-listed China stocks.
Baidu has taken a 7% stake in the travel booking platform Trip.com. The investment makes sense as the search engine likely directs a great deal of traffic to Trip’s site. Baidu is also betting on continued heightened demand for travel in China.
Shenzhen outperformed Shanghai overnight. The growth and technology-geared market saw increased volumes overnight, apparently due, in part, to a glitch in the Shanghai Stock Exchange’s trading technology, likely caused by massive demand for trading.
The Renminbi has been on a tear this week as demand increases for CNY-denominated assets. The USD exchange rate is near the psychologically important “7 Level”, at 7.01 CNY per USD overnight after rising as high as 7.24 earlier this year.
According to the latest Bank of America manager survey, the most popular trade was Long Magnificent 7, followed by Short Chinese Equities, so, yes, short covering is an element of the market action, though clearly there is more to it. Positioning is very light from investors globally as everyone appears to be overweight to US technology, Japan, and India. I have advocated taking a small piece of your profits from these big three over-weights and putting it into cheap China tech, based on US valuations and election volatility, the Yen headwind, and heightened India valuations.
India’s markets could be over-extended, with call options outnumbering put options by three-to-one on the India International Exchange as of data from earlier in the week. This reminds me of the “meme stock” rallies of 2021, which means it could unravel at any time.
The rewind back into China has started in the opposite order of the unwind. Last out were the Chinese, though they have been coming back via Hong Kong-listed growth stock buybacks and Southbound Connect. Asia will be next, as their money came out of China and went into US stocks, which could be affected by a weakening US dollar, Japan, and India. The Middle East, Latin America, and Europe, for whom China is the biggest customer, are likely to be next, given their more balanced outlook. US institutions will be the last, in my opinion, except for hedge funds, who don’t need to call an investment committee, board, or trustee meeting to make the move. US-based mutual funds will move due to likely large China under-weights at quarter end. This could cause tracking error and negative alpha. Again, the big US institutions will be very slow, in my view.
The Hang Seng and Hang Seng Tech indexes both closed higher by +3.55% and 5.78%, respectively, on volume that increased by +47% from yesterday. The top-performing sectors were Real Estate, which gained +7.65%, Health Care, which gained +7.02%, and Consumer Staples, which gained +6.59%. Meanwhile, the worst-performing sectors were Financials, which fell -0.01%; energy, which gained +1.46%; and Communication Services, which gained +2.49%.
Shanghai, Shenzhen, and the STAR Board all closed higher by +2.88%, +6.05%, and +6.76%, respectively, on volume that increased by +25% from yesterday. The top-performing sectors were Consumer Staples, which gained +7.48%, Health Care, which gained +7.32%, and Real Estate, which gained +7.32%. Meanwhile, the worst-performing sectors were Energy, which gained +0.82%; Utilities, which gained +0.83%; and Financials, which gained +2.58%.
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Last Night’s Performance
Last Night’s Exchange Rates, Prices, & Yields
- CNY per USD 7.01 versus 7.01 yesterday
- CNY per EUR 7.85 versus 7.84 yesterday
- Yield on 10-Year Government Bond 2.17% versus 2.08% yesterday
- Yield on 10-Year China Development Bank Bond 2.26% versus 2.16% yesterday
- Copper Price +0.23%
- Steel Price +1.57%