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Asian equities were mostly lower in a broadly risk off session following declines on Wall Street and a downgrade of China’s credit outlook following a similar downgrade for the US from Fitch.
Mainland investors bought the dip in Hong Kong in size. Southbound Stock Connect, which connects Mainland China investors with stocks listed in Hong Kong, saw net buying of over $500 million overnight. Clearly, Mainland investors believe the Hong Kong could be undervalued. Recently, the purchases through the mutual market access program have been focused on ETFs, rather than single stocks.
Moody’s’ downgrade of its China outlook to negative follows a similar downgrade for the US. Where do investors turn when the two largest economies are being downgraded? It is difficult to say. It is important to remember that credit ratings agencies’ decisions are always based on backward-looking data. China has over $3 trillion in foreign reserves and less than half of the sovereign debt of the United States.
Even if you believe the downgrade, the risks that it highlights are more than priced into equity valuations, in my opinion. On the bond side, many real estate developers are trading at less than 50% of par value, meaning this is likely priced in, too. China’s Treasury bonds have outperformed US Treasuries over the past two years by a significant margin. This is rare for an emerging market. If conditions are so bad, wouldn’t Treasuries be outperforming in a flight to safety?
WuXi Biologics continued its slide from yesterday as the trading halt on the stock was lifted in Hong Kong. All sectors in Hong Kong were lower with internet and growth/technology sectors seeing the brunt of selling. NetEase was lower despite being included in the latest round of game approvals. As a result, value sectors outperformed growth.
The Hang Seng and Hang Seng Tech indexes both closed lower by -1.91% and -2.05%, respectively, overnight on volume that increased +11% from…
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