Mainland Investors & Listed Companies Buy The Hong Kong Dip

Key News

Asian equities were lower on light volumes as investors sat on the sidelines in advance of central bank press conferences.

Mainland China and Hong Kong were lower on very light volumes. Mainland investors continue to buy the Hong Kong dip via Southbound Stock Connect with +$408 million of net buying today. Hong Kong-listed companies continue to buy back stock with nearly $9.4 billion (HK $73 billion) of buying this year, according to the South China Morning Post. I continue to recommend companies pay dividends as it rewards investors while hurting short sellers who would owe the dividend, thus making shorting more expensive. With buyers on the sidelines, short sellers pressed their bets, as 21% of Hong Kong’s Main Board turnover was short turnover.

As expected, the 1- and 5-year loan prime rates were left unchanged as policymakers adhered to their incremental policy adjustment plan. One could argue that there is a lack of urgency from policymakers, though, in their defense, the domestic economy is coming back, albeit slowly. The lack of urgency was evident in today’s joint press conference from the National Development and Reform Commission (NDRC), Ministry of Finance (MOF), and Ministry of Industry and Information Technology (MIIT). Steps taken to support the economy include issuance of bonds from local governments along with interest and deposit rate cuts, taxes adjusted to support small businesses along with loan support, 31 policy adjustments to support private businesses, and making personal income tax and minimum wage changes. Mainland media noted the feasibility of more bank reserve requirements and interest and mortgage rate cuts. Ultimately, we need catalysts for buyers to come back into the space, which they should as policy support filters its way into the real economy.

Hong Kong growth stocks and sectors were weak as Nio’s $1 billion convertible deal sank Hong Kong shares by -11.86%, weighing on fellow EV players like XPeng, which fell -5.61%, and BYD, which fell -0.89%, though Li Auto bucked the trend to close higher by +1.2%. Hong Kong’s most heavily traded stocks by value were Tencent, which fell -1.02%, Meituan, which fell -2.05%, and Alibaba, which fell -0.35%. Alibaba Pictures (1060 HK), which funded one of the Mission Impossible movies, jumped +5.45% overnight on an acquisition. Mainland markets were off, though Huawei and Apple suppliers were higher on strong sales. However, the Hong Kong-listed Sunny Optical fell -5.61% on talk of market share loss. Foreign investors were net sellers of Mainland stocks via Northbound Stock Connect. Shanghai, Shenzhen, and Hong Kong are near their August (year-to-date) lows, which should prompt more policy action.

My colleague Joe admonished me for leaving out a critical detail in Monday’s note. Since the Global Financial Crisis low in March 2009 through yesterday’s close, the S&P 500 Index is up +773% versus MSCI Emerging Market’s +201% and MSCI China’s 142%. Thus, many investors say EM and China are out of favor, though the MSCI All Country World Index ex US is +252%. Basically, NOTHING has worked in global markets other than the US stocks. What this narrative misses is the role of sectors as EM, China, and ACWI ex US had little to no growth sector exposure when the great growth stock bull market started. MSCI EM Tech gained +860%, though was only 11% of the index. MSCI China Tech gained +1,638%, though was only 2% of the index! That is literally why Jon Krane started the firm: to give investors exposure to the growth elements of China’s economy not captured by traditional indices. The narrative that China has not provided investors with great returns is factually inaccurate. You just had to go out of your way to get the growth stocks.

The Hang Seng and Hang Seng Tech indexes fell -0.62% and -1.58%, respectively, on volume that decreased -6.47% from yesterday, which is 62% of the 1-year average. 118 stocks advanced, while 366 fell. Main Board short turnover declined -6.53% from yesterday, which is 77% of the 1-year average, as 21% of turnover was short turnover. The value factor “outperformed” (i.e. fell less) than the growth factor as large caps “outperformed” small caps. All sectors were negative, as healthcare fell -2.31%, technology fell -1.71%, and communication services fell -1.46%. The top-performing subsectors were energy and insurance, while semiconductors, pharmaceuticals, and autos were among the worst-performing. Southbound Stock Connect volumes were light as Mainland investors bought a net $408 million worth of Hong Kong-listed stocks and ETFs, as the Hong Kong Tracker ETF saw moderate/large net buying, and Xpeng, ICBC, and CCB were small net buys. Meanwhile, Kuaishou was a small net sell, Hong Kong Exchanges, and CNOOC very small net sells.

Shanghai, Shenzhen, and the STAR Board all closed lower by -0.52%, -0.59%, and -0.87%, respectively, on volume that decreased -9.96% from yesterday, which is 65% of the 1-year average. 1,217 stocks advanced, while 3,524 declined. The value factor outperformed the growth factor, while large caps outperformed small caps. All sectors were negative, as consumer discretionary fell -0.89%, technology fell -0.85%, and industrials fell -0.83%. The top-performing subsectors were household appliances, agriculture, and banking. Meanwhile, restaurants, energy equipment, and the auto industry were among the worst-performing. Northbound Stock Connect volumes were light as foreign investors sold -$485 million worth of Mainland stocks, with Sokon and Midea as small net buys while Kweichow Moutai and Yili were small net sells. The Treasury curve steepened slightly. CNY was off small versus the US dollar, while the Asia Dollar Index managed a small gain. Copper and steel were both lower.

Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.29 versus 7.29 yesterday
• CNY per EUR 7.81 versus 7.79 yesterday
• Yield on 10-Year Government Bond 2.66% versus 2.66% yesterday
• Yield on 10-Year China Development Bank Bond 2.74% versus 2.76% yesterday
• Copper Price -0.32%
• Steel Price -0.39%