More Trick Than Treat On Profit-Taking

Key News

Asian equities were mixed overnight on light volumes, as Hong Kong and South Korea underperformed.

Mainland and Hong Kong growth stocks were hit with profit-taking after a five-day win streak in Hong Kong and China. My glowing assessment of investors’ preference for growth stocks yesterday, i.e., the “good stuff,” clearly jinxed the space.

The “official” October Manufacturing PMI of 49.5 missed expectations of 50.2 and September’s 50.2, while the Non-Manufacturing PMI came in at 50.6 and missed expectations of 52 and September’s 51.7. The PMIs, a diffusion index (readings +50 growth and -50 decreasing) released by the National Bureau of Statistics, were released at the market open, weighed on foreign sentiment in Hong Kong more so than in Mainland China, which curtailed intra-day losses with a late-day rally.

Hong Kong saw all sectors negative while the Mainland was mixed. Was the PMI survey’s month-over-month decline affected by the week-long National Holiday vacation the first week of October? It is hard to say, though Chinese workers get two, week-long vacations a year, with the National Holiday being one of them, so it is taken very seriously. Despite Western media’s narrative, remember China’s last recession was in 1993.

The PMI release caught the attention of government and economic policymakers attending the National Financial Work Conference twice a decade, which helps guide monetary policy in the coming years. This conference, attended by President Xi, does not provide actionable measures, though the release highlighted the importance of finance to the economy. On the horizon is the Central Economic Work Conference (CEWC
EWC
), occurring in early December, which will provide transparency on economic measures to be taken. We also have the potential for a Biden-Xi meeting at Asia Pacific Economic Cooperation (APEC) Conference in a few weeks. It is worth noting that US and Chinese military officials met in Beijing.

There is a fair amount of chatter about Chinese media turning more favorable to the US as the distraction technique of politicians is not a uniquely American trait. While US politicians would rather be talking about China than the budget deficit, US government debt, gun violence, homelessness, etc, the same is true in China, which would rather not discuss youth unemployment, real estate problems, etc.

BYD is an example of profit taking as the Hong Kong share class -3.57% and the Mainland China share class -2.48% (another example of foreign freak-out versus Mainland investors) despite the after the close release of Q3 financial results net income +82.2% year over year and revenue +38.5%.

After the Hong Kong close, Berkshire Hathaway
BRK.B
trimmed their stake in BYD by 0.07% to 7.98%. The electric vehicle (EV) ecosystem was pressured by the poor financial results of Ganfeng Lithium (0024600 CH) -3.17%. Healthcare was mixed on Q3 financial results while Hong Kong internet names less Kuiashou were whacked on profit taking. Foreign investors were net sellers of Mainland stocks via Northbound Stock Connect, while Mainland investors bought the dip in Hong Kong stocks via Southbound Stock Connect.

The Ministry of Finance reported that insurance companies will be allowed to increase their equity exposure, which may explain the late afternoon bounce in China. Taking a spin on the famous Dirty Harry quote, do investors have the guts to buy the dip? Yes, it is a challenging environment with the Middle East crisis and Fed meeting, though there is a path for things to improve/get less bad. We shall see!

The Hang Seng and Hang Seng Tech indexes fell -1.69% and -2.47%, respectively, on volume that decreased -8.46% from yesterday, 75% of the 1-year average. 96 stocks advanced, while 381 declined. Main Board short turnover increased +2.62% from yesterday, which is 81% of the 1-year average as 18% of turnover was short turnover (remember Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). The value factor and large caps “outperformed”/fell less than the growth factor and small caps. All sectors were negative: tech -3.72%, real estate -2.91%, and discretionary -2.55%. Food was the only positive sub-sector, while semis, technical hardware, and healthcare equipment were the worst. Southbound Stock Connect volumes were light as Mainland investors bought $247mm of Hong Kong stocks and ETFs with insurance PICC, CSPC Pharmaceuticals, and Meituan small net buys, while Tencent and energy giant CNOOC were small net sells.

Shanghai, Shenzhen, and the STAR Board fell -0.09%, -0.53%, and -0.42%, respectively, overnight on volume that fell -11.53% from yesterday, which is 105% of the 1-year average. 1,652 stocks advanced, while 3,166 declined. Value and large caps “outperformed” (i.e. fell less than) the growth factor and small caps. The top-performing sectors were energy, which gained +1.24%, utilities, which gained +0.4%, and financials, which gained +0.35%, while consumer discretionary fell -1.42%, industrials fell -1.01%, and technology fell -0.81%. The top sub-sectors were chemicals, coal, and highway, while construction machinery, auto, and motorcycle were the worst. Northbound Stock Connect volumes were moderate as foreign investors sold -$649mm of Mainland stocks with Maxscend, Mindray, and Wuliyange small net buys, while Wuxi AppTech and Changan Auto were small net sell, BYD and ICBC were moderate/large net sells. CNY and the Asia dollar index were flat versus the US dollar. The Treasury curve flattened while copper and steel gained.

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Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.31 versus 7.31 yesterday
• CNY per EUR 7.79 versus 7.74 yesterday
• Yield on 10-Year Government Bond 2.69% versus 2.71% yesterday
• Yield on 10-Year China Development Bank Bond 2.74% versus 2.75% yesterday
• Copper Price +0.22% overnight
• Steel Price +0.11% overnight