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Market Rallies On Government Policy, How Apple Is More China Exposed Than US Investors, Week In Review

News Room

Published

August 4, 2023

Week in Review

Asian equities ended July on a high note before experiencing profit taking this week, especially growth stocks and sectors that had done well in July.
China’s manufacturing PMI for July beat expectations, while services came in shy of expectations though still indicated expansion.
Yum China, which operates a variety of American fast-food chains in China, reported results that looked strong compared to 2019, indicating a strong consumer comeback, but revenue that was just below lofty analyst expectations.
In the latest effort to improve the attractiveness of China’s capital markets, the PBOC announced plans to open a STAR Market equivalent for fixed income, focusing on technology startups.

Key News

Asian equities were largely higher except for Taiwan, South Korea, and the Philippines.

US-listed China stocks had a very strong day yesterday after the city of Zhengzhou announced that it would halt home buying restrictions and Beijing released further policy support overnight. Zhengzhou has been used in the past to beta test real estate policies, indicating that other cities may soon follow suit. Several cities have already eased restrictions on second home purchases.

Also lifting China stocks was an economic policy press conference, held at 10 am Friday. The key is this: rising housing prices lead to rising consumer confidence, which leads to rising domestic consumption. This also explains why the government wants the stock market higher because that would make citizens feel richer and raise consumer confidence, which would lead to increased domestic consumption. I will not bury the headline: the Chinese government is telling investors to buy stocks! Mainland China stockbrokers were up as three brokers were the most heavily traded stocks by value.

The joint press conference from the National Development and Reform Commission (NDRC), Ministry of Finance (MoF), People’s Bank of China (PBOC), and State Taxation Administration reiterated a host of tax, interest rate, monetary, and fiscal policies to support businesses and the economy.

Both Mainland China and Hong Kong opened higher, but eased later in the session, off intra-day highs. Hong Kong-listed China stocks had a good day, though not quite as good as the stocks yesterday, thus we are seeing a slight pullback in the US listings today.

Mainland China turnover was above the RMB 1 trillion level as foreign investors were net buyers of Mainland stocks via Northbound Stock Connect. Mainland investors were net sellers of Hong Kong stocks, though the selling appeared to be concentrated in Hong Kong-listed ETFs. I do not understand the recent large Southbound ETF inflows and outflows, but I will investigate.

On Thursday, Alibaba will report quarterly financial results and numerous companies will follow suit, reporting the week of August 14^th. Remember that this will be an easy year-over-year comparison due to Shanghai’s lockdown in Q2 2022. Do you think investors are allocated for Chinese companies to report great earnings? Me neither!

I am headed to Taiwan this weekend for work. For on-the-ground updates, follow me on Twitter @ahern_brendan.

The House Committee recommended Biden ban US investors from investing in Chinese stocks and bonds. Scary right? Remember our news risk analyzer is CNH, China’s currency trading during US trading hours. Did CNH react to this news? No, nor did US listed China stocks. Why? This committee has no law-making capability. The Biden administration will restrict private equity because public stocks do not fund companies.

Think about this: China is 3.3% of the MSCI All Country World Index versus the US, which makes up 62% of the index. This is tiny, especially considering that China is the second largest economy. 19.26% of Apple’s quarterly revenue was from China. With a market cap of nearly $3 trillion, almost $600 billion of Apple’s market cap is supported by China. MSCI ACWI has $65 trillion of market cap, so China has $2 trillion of total market cap held by local, foreign and US investors. It is likely Apple’s market cap supported by China revenue is nearly as large as all US investors’ ownership of Chinese stocks.

New members of the House face re-election every two years which means they are constantly on a reelection campaign. The more media attention the more it helps your re-election campaign. Thus, new House members can have “extreme” views to make a name for themselves and solidify their job (jerrymandered House districts only exacerbates this, in my opinion). Due to the short tenure, House staffers have less job security meaning they might have trouble attracting experienced staffers early on. Once they are established and secure their position, House members can attract top-notch staff. Senators, on the other hand, have a six-year tenure and therefore tend to be more balanced. Longer tenures mean more job security and better staffers. The White House tends to be the most balanced as they have significant policy heft, maintain diplomatic relations, and everyone wants the White House on their resume. This is a good framework for how to think about who is making the news.

The Hang Seng and Hang Seng Tech indexes gained +0.61% and +2.06%, respectively, on volume that increased +13.1% from yesterday, which is 101% of the 1-year average. 257 stocks advanced while 214 declined. Main Board short turnover declined -1.77% from yesterday, which is 86% of the 1-year average as 14% of turnover was short turnover. The growth factor outperformed the value factor while large caps outpaced small caps. The top-performing sectors were consumer discretionary, which gained +2.07%, consumer staples, which gained +1.58%, and technology, which gained +1.19%. Meanwhile, industrials and utilities were off -0.18% and -0.01%, respectively. The top-performing subsectors were retail, media and healthcare equipment. Meanwhile capital goods, utilities, and transportation were among the worst. Southbound Stock Connect volumes were high as mainland investors sold a net -$821 million worth of Hong Kong-listed stocks and ETFs as two ETFs, in particular, saw large net outflows, Tencent saw a small net outflow, CNOOC was a very small net buy, and Meituan was a small net sell.

Shanghai, Shenzhen, and the STAR Board gained +0.23%, +0.48%, and +0.56%, respectively, on volume that increased +26.4% from yesterday, which is 118% of the 1-year average. 2,235 stocks advanced while 2,396 stocks declined. The growth factor outperformed the value factor as large caps outperformed small caps. The top-performing sectors were communication services, which gained +3.23%, technology, which gained +1.16%, and consumer discretionary, which gained +0.65%. Meanwhile, healthcare fell -0.6%, utilities fell -0.35%, and real estate fell -0.22%. The top-performing subsectors were telecom, computer hardware, and diversified financials. Meanwhile, forest industry, highways, and textiles were among the worst. Northbound Stock Connect volumes were high as foreign investors bought a net $381 million worth of Mainland stocks with Kweichow Moutai a large net buy, Citic was a small net sell, and Ping An was a very small net sell. CNY and the Asia dollar index fell versus the US dollar index. Treasury bonds and steel fell while copper gained.