Real Estate Weighs On Sentiment

Key News

Asian equities were lower as the Philippines outperformed and Hong Kong underperformed, while Pakistan was closed for Mawlid-al-Nabi, the celebration of Mohammad’s birth.

Real estate headlines surrounding Evergrande’s continued troubles weighed on sentiment. Does the Fed and US government regret allowing Lehman Brothers to go bankrupt? I would hope so, which begs the question: why would the Chinese government allow Evergrande, or other big, distressed developers, to suddenly go bankrupt? Yes, the companies will cease to exist at some point/need to finish all of their projects, but a sudden default remains unlikely. The issue won’t go away as bond coupons and principal repayments will continue to be problematic. Did you know China hasn’t had a recession in thirty years despite the constant narrative of impending doom? Ultimately, buyers remained on the sideline.

The Hang Seng closed at 17,466, which exacerbated selling pressure as many local structured products had 17,500 as a floor price. Mainland investors continue to buy Hong Kong stocks on the dip via Southbound Stock Connect, though three Hong Kong-listed ETFs saw selling from Mainland investors. Shanghai and Shenzhen were off but far less than Hong Kong in another example of the “foreign freak out” (Shanghai and Shenzhen are predominantly owned by investors in China and thus more reflective of domestic investors’ sentiment, while Hong Kong is predominantly held by investors outside of China thus marking it indicative of foreign investors sentiment).

AI/ChatGPT names outperformed, which lifted Baidu in Hong Kong, though widely held Hong Kong names were lower despite new game approvals. Foreign investors were large net sellers of Mainland stocks via Northbound Stock Connect to the tune of -$861 million, which weighed on large growth stocks. CATL was lower on reports that Ford has suspended building the partnership battery plant, which might be strike-related. After the close, Alibaba’s logistics arm Cainiao filed for its Hong Kong IPO as plans to force the sum of the parts analysis by splitting the company moves forward. Beijing will lower real estate commissions, which weighed on KE Holdings’ Hong Kong listing, which was down -8.98%. China’s Foreign Minister stated a Biden-Xi summit at APEC this November hasn’t been confirmed. Despite the poor performance, there continues to be talk about value investors circling the space due to the fundamentals, buybacks, and short interest increasing, which can be a contrarian indicator.

The Hang Seng and Hang Seng Tech fell -1.48% and -1.69% on volume +11% from yesterday, which is 72% of the 1-year average. 105 stocks advanced, while 385 declined. Main Board turnover declined -9.37% from yesterday, which is 72% of the 1-year average, as 17% of volume was short turnover (remember Hong Kong short turnover includes ETF short volume, which is driven by market makers’ hedging). Value and growth factors were both off as small caps fell less than large caps. All sectors were negative, with tech -2.15%, real estate -1.75%, and materials -1.52%. Household products were the only positive sub-sector, while auto, insurance, and consumer durables were the worst. Southbound Stock Connect volumes were light as Mainland investors bought $20 million of Hong Kong stocks and ETFs and were net buyers of Hong Kong stocks with Tencent, Meituan, and Li Auto small net buys while the Hong Kong Tracker ETF saw a large outflow, Hang Seng and Hang Seng Tech ETFs seeing moderate net sells.

Shanghai, Shenzhen, and STAR Board were mixed -0.43%, -0.52%, and +0.17% on volume -7.23% from yesterday, which is 76% of the 1-year average. 1,675 stocks advanced, while 3,085 stocks declined. Value and growth factors were off, while large caps fell less than small caps. Communication and tech were the only positive sectors, +0.78% and +0.15%, while discretionary -0.94%, materials -0.9%, and staples -0.82%. The top sub-sectors were motorcycle, software, and internet, while telecom, auto, and airport were the worst. Northbound Stock Connect volumes were light as foreign investors sold -$861 million of Mainland stocks, with Midea a small net buy, while BYD, Kweichow Moutai, and Ping An were moderate net sells. CNY is bouncing just below 7.31, while the Asia dollar index fell overnight. Copper and steel were lower.

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Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.30 versus 7.31 yesterday
• CNY per EUR 7.74 versus 7.76 yesterday
• Yield on 10-Year Government Bond 2.69% versus 2.70% yesterday
• Yield on 10-Year China Development Bank Bond 2.78% versus 2.78% yesterday
• Copper Price -0.53% overnight
• Steel Price -1.18% overnight