Asian equities were a sea of red with the exception of China and Hong Kong as growth sectors/stocks recovered/outperformed value sectors/stocks. Both China and Hong Kong had shaky sessions with a late-day rally led by chatter from China’s national team buying the dip and could also add influx of foreign investors amounting to $1,434 billion via Northbound Stock Connect. The national team is the term used for Chinese government-related pension funds, sovereign wealth funds and other strategic capital pools.
The skeptic will say that this is market intervention. Interventions by central banks in the US (ie the Fed’s balance sheet) and Japan (BoJ ownership of ETFs and bonds is just staggering, though they get shockingly little attention) have become commonplace. You could also say that these are asset allocators that buy stocks when they are low, such as US pension funds that rebalance the balance between stocks and bonds at the end of the month. All in the eye of the beholder, although the truth probably lies somewhere in between.
Despite the Covid outbreak in China and its effect on the global economy, which is a reflection of lower commodity prices, there were also several positive catalysts. Shanghai has outlined a path to roll back lockdowns based on neighborhood tests, showing a positive sign. Following the China/Hong Kong shutdown, the National Press and Publication Administration approved forty-five new games, leading to strong returns for US-related ADRs. Investors are taking the move as a sign of the end of the gambling regulatory cycle. Tencent, Netease and Bilibili had no games on the list, but rose on broader positive sentiment towards the sector. We also had better-than-expected new loan and funding data in March which was also released after yesterday’s Hong Kong/China close. It is also expected that the policy support will have to be applied sooner rather than later. The Department of Commerce and the Department of Transport said they would work to ensure cargo and logistics in the areas of the outbreak would continue to operate. We would have liked today’s market action to be accompanied by solid volumes, but we will accept it!
The Hang Seng Index gained +0.45%, while the Hang Seng Tech gained +1.4% by volume +4.95% from yesterday, which is 88% from the 1-year average. Advancers outperformed fallers from 254 to 218, while short sales volume rose to 114% from the 1-year average. Hong Kong internet names had a strong day excluding Kuaishou on yesterday’s data announcement from the State Council. Tencent and Kuiashou were a small net outflow of mainland investors via Southbound Stock Connect, although Meituan again had a net buying day on a total net buying day. Growth sectors outperformed, led by communications, discretionary goods, staples, healthcare and technology, while value sectors such as financials, energy, materials and utilities lagged.
Shanghai, Shenzhen and STAR Board gained +1.46%, +1.81% and +0.57% by volume -5.16% from yesterday, which is 86% of the 1-year average. Beam had 3,400 advances versus 942 stragglers. Quality and, to a lesser extent, growth were key factors, while dividends and value were the worst performers. Real estate was the only declining sector. Foreign investors today bought $1.434 billion worth of mainland stocks. Treasuries, CNY vs. US$, and copper were all off by a small margin.
Our friend Troy asked me last week about the credibility of US regulators who approved their US-China lists and are now tasked with potentially scrapping them. The SEC is simply the enforcement agent of the HFCAA, although they did allow these companies to list here, knowing they could not adhere to PCAOB audit ratings. That said, there was no reason at all for them not to have them on the list. It brings up an interesting point about the ecosystem that benefited from their listings, although it doesn’t impact a potential takedown. Private equity managers and their institutional investors made a lot of money by smartly investing early and exiting through a US IPO. That IPO put American investment bankers to work who were paid handsomely. Law firms and accountants were paid for their work in the IPOs. Exchanges made a lot of money from listing fees.
Who will hold the bag at the HFCAA? Individual investors who are unable to convert their ADRs to the Hong Kong share class are either unaware of the HFCAA or have been forced to sell because they cannot or will not hold a US listing. Every ounce of idealism has been extinguished from me by building a company that competes with big corporations. At the same time, this is another case of American wealth inequality that is completely preventable — ever seen an interview with a politician who voted for the HFCAA? Me neither. No one has talked about this story, but hopefully someone will. It’s not just unfair; it’s un-american!
Last night’s exchange rates, prices and returns
- CNY/USD 6.37 vs 6.37 yesterday
- CNY/EUR 6.93 vs 6.96 yesterday
- 10-Year Treasury Yield 2.77% vs. 2.77% Yesterday
- Yield on 10-Year China Development Bank Bond 3.01% vs. 3.00% Yesterday
- Copper price -0.23% overnight