Xiaomi Roars Silently, Trade Deal Details Needed, Week In Review

Week in Review

• Asian equities were mostly higher this week, as Japan and China outperformed, while Indonesia and Australia underperformed, after Israel and Iran agreed to a ceasefire following US strikes.
• Six government agencies announced various measures, including expanding consumer lending and strengthening access to pensions for individuals, to stimulate domestic consumption in a joint press release on Wednesday.
• Brokerage firm Guotai Junan International became the first Mainland China-based company to offer trading accounts for cryptocurrency, making them available to clients in Hong Kong after securing approval from the special administrative region’s (SAR) Securities & Futures Commission (SFC).
• Starbucks rebuffed media reports about selling its entire China business. Executives said that the global premium coffee shop giant would only pursue a partial sale of its China assets and remained confident in its “strong team” within the country.

Key News

Asian equities ended a positive week mixed, as Japan outperformed, while Indonesia and Malaysia were closed for the Islamic New Year, which is also known as Hijri New Year, marking the start of the Islamic calendar.

Yesterday, we wrote about Harvard’s Graham Allison stating at the Summer Davos that the US and China would announce a trade deal next week. Commerce Secretary Lutnick confirmed that such a deal had been signed after the US markets’ close. China’s Ministry of Commerce (MoC) confirmed the deal at a 3 pm press conference. When a Reuters reporter asked about China releasing rare earths, the answer was “China will approve the export applications of qualified controlled items”. A lack of details on the new agreement, combined with strong performance from earlier this week, explains the lackluster returns in Asia overnight. Investors probably need to hear more, though the Wall Street Journal correctly notes the recent regulation of two fentanyl precursors following a meeting with US Ambassador Perdue.

One negative weighing on markets was May’s industrial profits, which declined 9.1% year-over-year (YoY) from April’s 3.0%. This brings the year-to-date (YTD) change in industrial profits to -1.1% from April’s YTD increase of 1.4%. The main culprit appears to be the high bar presented by the YoY comparison, as industrial profits, sales, and receivables all increased on a month-over-month basis. National Bureau of Statistics (NBS) statistician Yu Weining stated that “short-term factors such as investment income had a high base in the same period last year”, as “multiple factors such as insufficient effective demand, falling industrial product prices, and short-term fluctuations” influenced the readings.

Xiaomi was Hong Kong’s most heavily traded stock by value, gaining +3.6% on a massive volume worth HKD 28.7 billion (481 million shares traded) versus 126 million shares traded yesterday. The company received 289,000 orders for its new YU7 SUV, which will cost RMB 253,000 ($35,366).

Guotai Junan International shares fell -14.69%, though they remain well above Tuesday’s close, which was before their cryptocurrency trading approval in Hong Kong and subsequent surge. Markets in Hong Kong and Mainland China were weighed down by the poor performance of subsectors that are large index weights, including large banks, insurance companies, liquor, oil & gas, and telecom. The underlying stocks are mainly listed on the Shanghai Stock Exchange, representing a 0.70% weight, which explains its underperformance versus the Shenzhen Component Index, which gained +0.34%. Technology hardware, arguably a beneficiary of better US-China trade talks, mining, precious, and base metals all had good sessions.

A non-factor in last night’s performance was the Monetary Policy Committee Q2 press release from the People’s Bank of China (PBOC), China’s central bank, following their June 23^rd meeting. The release acknowledges that the “current external environment is more complex and severe, the momentum of world economic growth is weakened, and trade barriers have been increased”. However, “China’s economy is showing a positive trend, social confidence continues to be boosted, and high-quality development has been steadily promoted.” Because the economy “…still faces difficulties and challenges such as insufficient domestic demand…”, the PBOC will “implement a moderate loose monetary policy, strengthen countercyclical regulation, better play the dual functions of the total amount and structure of monetary policy tools, increase the coordination between monetary and fiscal policies, and maintain stable economic growth and reasonable prices.”

Premier Li and the State Council met to discuss plans on implementing the “National Science and Technology Conference and accelerating the construction of a strong science and technology country”. The release highlighted policies on how to “accelerate the high-level self-reliance in science and technology”. Hopefully, we will see a bigger market reaction as the trade deal details are released.

MSCI China’s earnings per share (EPS) growth estimate for the next year is 7.44% (S&P 500’s 6.32%, Euro Stoxx’s is 2.77%). The problem with buying the broad benchmark is that not all sectors are growing that fast. For instance, MSCI China’s Financial Sector, which makes up about 18% of the index, has an EPS growth estimate for the next year of only 0.99%. On the other hand, MSCI China’s Technology Sector has an EPS growth estimate for the next year of 55%! Draw your own conclusion, though I think you can guess where my chips are placed!

In preparing to speak to a foreign institutional investor, I realized that one of the largest companies in that country is a commodity producer that generates 50% of its revenue in China. In March, Brazilian mining giant Vale’s CEO, Gustavo Pimenta, stated, “The tone has changed a lot. Economic activity has reacted. There has been a lot of stimulus for consumption, heated manufacturing, and consistent investment in infrastructure.” Sounds positive to me!

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Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.17 versus 7.17 yesterday
• CNY per EUR 8.41 versus 8.40 yesterday
• Yield on 10-Year Government Bond 1.65% versus 1.65% yesterday
• Yield on 10-Year China Development Bank Bond 1.69% versus 1.69% yesterday
• Copper Price 1.27%
• Steel Price 0.81%