It is likely China’s “national team”, government-affiliated institutional investors such as pension plans, were buying overnight in the Mainland market.
At the bottom of today’s note is a review of what got us here and where we are going. Asia was largely off as Hong Kong rebounded while mega-caps in China outperformed. Tuesday’s Hong Kong plunge was likely exacerbated by warrants hitting knock-out levels. Warrants are structured products built by investment banks using a stock’s options. Local investors want principal protection as they can earn high rates of return in bonds and money market funds. Banks build principal-protected structured products by buying calls on a stock while also buying puts. These products, therefore, have price levels that require the structured products to terminate when levels are hit to the downside. The banks hedge themselves using the underlying stock. So, Tuesday’s drop led the bank to sell stock in as the structured products hit the downside. Last night I hit my local Hong Kong expert Ken who agreed with my theory. Mainland markets were led higher by mega-caps as healthcare was very strong overnight as cases in Japan and Indonesia have spiked and several flare-ups were seen in China. It is likely China’s “national team”, government-affiliated institutional investors such as pension plans, were buying overnight in the Mainland market. Known as the plunge protection team, these are long-term buyers that simply buy low when there is panic selling sticking to high-quality large/mega caps. There was a significant amount of Mainland financial media coverage going into today on the irrational move in Mainland equities Monday and Tuesday. EV battery behemoth CATL spiked +6.07% after announcing the development of a sodium-ion battery. Semiconductors and the STAR Board were off overnight, nullifying, at least in the short term, my theory yesterday that policy wants to see capital committed to industries that will lead China’s economy in the decades to come. Hong Kong saw internet names rebound overnight as they are buys for value investors. Volumes in Tencent +0.27% and Meituan +7.53% were massive. The Ministry of Industry and Information Technology (MIIT) announced that a six-month review period for internet companies commenced on July 23 rd. This would provide a finish line to regulation, which investors should cheer. The announcement isn’t necessarily a bad thing as we continue to see companies adhere and adapt to regulation with Q4 2020 earnings reported in February and Q1 2021 earnings reported in May were strong. Alibaba released a letter from Chairman and CEO Daniel Zhang in advance of their financial results next Tuesday. Interesting timing right? The letter speaks to the strength of their retail business, growth of cloud computing unit and SE Asia e-commerce unit, Lazada. It notes they paid their fine and will continue to adhere. Apple’s AAPL net sales included a nice increase from China as revenue grew to $14.762B versus $9.329B year over year in Q2 and $53.803 versus $32.362B year to date year over year. A Mainland media source is reporting that foreign ownership caps might be scrapped as Volvo wants to buy out parent Geely.
