Notes From Hong Kong: Good News to Support the Uptrend

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 |  Includes: EWH, FXI, PGJ
by: L. Desjardins

With Hong Kong at a 2.5 years high and Shanghai on a tear, economic news from Beijing will dominate the market this week. On Monday investors will try to figure out if there any thing new from the Chinese Communist Party discussion over the next 5-year plan following its annual meeting on the week end. Also on the mind of many may be the outcome of the G20 Finance ministers on Thursday although not much is expected. The main items for the market come on Thursday with the monthly slew of key economic data about the GDP, inflation, retail sales and industrial production.

INDICES 1 week 4 weeks YTD
Hang Seng Index 3.5% 8.1% 8.6%
HS China Enterprises 6.7% 11.8% 6.4%
FTSE/Xinhua A50 11.8% 19.0% -13.2%
Shanghai Composite 8.5% 14.3% -9.3%
CSI 300 9.3% 16.3% -6.6%
US ETFs
EWH 1.3% 10.1% 18.7%
FXI 4.1% 10.1% 7.1%
PGJ 4.2% 12.8% 12.6%
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Chinese trade figures released last week showed that the export sector was still doing well. Exporters stocks should continue to do well on Monday on the back of better than expected retail sales in the US announced on Friday. This week we should have an idea on how the overall economy is doing with the release on Thursday of the GDP data for the third quarter. Forecasts call for a healthy slowdown 9.5% yoy, compared to 10.3% the previous quarter. Last week, the Shanghai Securities Journal cited a government research institute as saying China’s GDP will rise by 9.9% this year. A Reuters survey of economists put the 2010 growth estimate at 10%, slowing further to 8.9% in 2011.

Fears of inflation triggering a rise in interest rates and further tightening may be alleviated with CPI for September estimated at 3.6% yoy, just slightly higher than the 3.5% for August. Tame inflation figures will help the appreciation of the yuan before the G20 head of states meeting in mid November. The yuan appreciation is further supported by the large trade surplus of $16.9B registered in 3Q. Concerns will remain as the price of food is clearly on the rise. Retail sales and data for industrial production will also be released on the same day.

Both the Shanghai and the Hong Kong markets have been strong in recent weeks and may be due for a correction. Investors sentiment could go either way following the release of these figures but the general feeling is that the uptrend should remain intact till the end of the year.

Best reflecting the exuberance of the market, one of the best performer among the Hang Seng Index constituents has been the Hong Kong Exchange itself. The stock is up 46% since September 1 on the assumption of good earnings from higher volume and IPOs. Money is certainly flowing into Hong Kong and volumes are at levels not seen since the early part of 2009. QE seems to have a bigger impact on Hong Kong than New York.

Volumes in Shanghai have also exploded to the upside but the money flow is largely domestic. The finance ministry said on Thursday that government spending increased nearly 30% yoy in September. The Shanghai Composite is up 12% in the past 6 sessions, since the return from the national holidays on October 8.

In Shanghai, energy stocks were up 16% last week on expectation that they will be among the beneficiaries of new measures to be announced after the CCP meeting over the week end.

Results from FXI constituents:
Friday Oct 22: Datang International Power: 3Q

SECTORS – CHINA 1 week 4 weeks YTD
CSI300 Energy 16.4% 29.8% -11.5%
CSI300 Materials 13.1% 26.4% 3.7%
CSI300 Industrials 8.2% 13.7% 0.1%
CSI300 Cons. Discretionary 3.1% 8.2% -0.7%
CSI300 Cons. Staples -6.3% 0.5% 3.0%
CSI300 Healthcare -4.9% -0.4% 16.9%
CSI300 Financials 13.9% 20.2% -15.9%
CSI300 Technology -2.9% -2.8% 13.6%
CSI300 Telecom 2.1% 0.5% -19.3%
CSI300 Utilities 8.0% 8.7% -10.6%
SECTORS – HONG KONG 1 week 4 weeks YTD
HS Financials 5.2% 7.7% 3.1%
HS Utilities 0.6% -0.2% 14.2%
HS Property 1.0% 10.2% 14.2%
HS Commerce & Industry 2.7% 9.3% 14.1%
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FTSE Xinhua A50 is a market capitalization weighted index comprising the 50 largest “A” (domestic) shares listed in China. In Hong Kong the ETF 2823:HK tracks the index; in the US, FXI tracks a sister index including only the 25 largest mainland companies listed in Hong Kong. The Hang Seng China Enterprises Index covers 40 “H” shares issued by mainland companies listed in Hong Kong. In Hong Kong the ETF 2828:HK tracks the index. The Hang Seng Index currently covers the 43 largest Hong Kong listed companies by capitalization. These HK listed companies include a number of mainland Chinese companies. In Hong Kong the ETF 2800:HK tracks the index. In the US, EWH tracks the MSCI Hong Kong Index which is substantially different from the Hang Seng Index.

Disclosure: Long FT/Xinhua A50 and CSI300