Hong Kong Internet Stocks Fly On Significant Volume Increase

Key News

Asian equities were largely higher as Hong Kong outperformed and India underperformed.

Today was more important than what initially meets the eye as Hong Kong volumes were 130% of the 1-year average and were +31% from yesterday. It was the highest volume day in Hong Kong since the mid-March meltdown except for MSCI’s index rebalance trade date of May 31^st. The catalyst was the approval of sixty new online video games which served as another sign that China’s internet regulatory cycle is easing following yesterday’s Didi news.

Today’s most heavily traded stocks in order were Tencent +6.47%, Alibaba HK +10.12%, Meituan +4.62%, JD.com HK +6.45%, and Kuaishou +2.88%. Other notable stocks that were heavily traded included NetEase HK +5.66% (11^th), Baidu HK +6.07% (12^th), and Bilibili +19.62% (17^th). Heavy volume days are important as they indicate big money being put to work.

We know global and emerging market funds have been underweight in China. The rally since mid-March makes that underweight status increasingly uncomfortable as we near the end of the quarter when top holdings need to be disclosed. It is also worth noting that today’s strong rally was focused on Hong Kong and internet stocks (the offshore market predominantly held by foreign investors) while Shanghai and Shenzhen (the onshore market 90% held by domestic Chinese investors) posted small gains.

Hong Kong and China ADRs largely influence foreign investors’ definitions of China. Foreign investors’ view of China is improving as the country moves toward an easing cycle while the rest of the world is tightening.

The onshore market had a strong net buy from foreign investors via Northbound Stock Connect while Mainland investors took profits in their Hong Kong stocks via Southbound Stock Connect. As my colleague Xiaolin pointed out to me, we marked the regulatory cycle end with Vice Premier Liu He’s speech back on March 16^th. Before I start strutting around the ring like Connor McGregor, I will remember that “the tall poppy gets cut”.

The Hang Seng and Hang Seng Tech gained +2.24% and +4.76% respectively on volume +31.37% from yesterday which is 130% of the 1-year average. 352 stocks advanced while 124 declined. Hong Kong short sale volume increased +31.12% which is 142% of the 1-year average. Growth factors outperformed value and dividend factors significantly posting a gain of +3.43% and +2.72%. Small caps outperformed large caps as well. Top sectors were discretionary +6.4%, communication +6.23%, and healthcare +6.23%. Utilities was the only negative sector with a loss of -1.16%.

It was a broad rally with retailers, pharmaceuticals, software, healthcare equipment, and consumer services outperforming. Telecom, banks, and utilities were underperforming sub-sectors. Southbound Connect volumes were high as Mainland investors were net buyers of Tencent while selling Meituan and Kuiashou.

Shanghai, Shenzhen, and STAR Board gained +0.68%, +0.52%, and +0.03% respectively on volume of +5.73% which is 101% of the 1-year average. 1,253 stocks advanced while 3,122 stocks declined. Large-cap stocks outperformed small caps stocks while growth factors outperformed value factors by a small margin. Top sectors were energy gaining +3.54%, consumer staples +1.46%, and discretionary +1.33% while real estate, communication, and tech posted negative gains of -1.1%, -0.38%, and -0.2% respectively.

The top sub-sectors were coal, lithium, auto, and pharmaceuticals. Foreign investors bought +$862mm of Mainland stocks today via Northbound Stock Connect. Treasury bonds sold off slightly. CNY declined versus the US dollar to 6.68 from 6.66 and copper gained +0.01%.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.68 versus 6.67 yesterday
• CNY/EUR 7.18 versus 7.12 yesterday
• Yield on 10-Year Government Bond 2.77% versus 2.76% yesterday
• Yield on 10-Year China Development Bank Bond 2.99% versus 2.98% yesterday
• Copper Price +0.01% overnight