Sector rotation goes global as semiconductor stocks fall

Main news

Asian stocks rose, with the exception of Taiwan, South Korea and regional semiconductor stocks, on potential restrictions on US chip exports and ASML’s weak outlook. However, the rotation out of mega-cap technology stocks Magnificent 7/US could likely hurt their global counterparts.

According to Google, India was closed for Muharram, the first month of the Islamic calendar, and Pakistan was closed for Ashura, the tenth day of Muharram.

Markets remained largely calm ahead of the release of the third plenum tomorrow evening. There was very little news to move markets, with unemployment among youth aged 16-24, excluding students, improving in June but remaining elevated at 13.2% from 14.2% in May. The IMF raised its GDP forecast for 2024 from 4.8% to 5% due to “the recovery in domestic consumption driving positive growth in the first quarter” and “a rebound in private consumption and strong exports in the first quarter”.

There was some rotation today, with the healthcare sector being the best performers in Hong Kong, up +2.41%, and in mainland China, up +2.24%, on little news, which was less of an upgrade from the sell side of Hong Kong’s online healthcare companies. Alibaba Health gained +8.57%, Ping An Healthcare gained +9.62% and JD Health gained +3.83%. However, would you believe that these companies are consumer packaged goods given their status as “drug retailers” under the Global Industrial Classification (GIC)?

In keeping with the sector rotation, consumer staples outperformed in Hong Kong and Mainland China, gaining +2.08% and +2.35% on rumors that a new consumption tax would exclude alcohol stocks. Kweichow Moutai also gained +1.72% on the news. Investors shunned energy, the worst-performing sector in Hong Kong and Mainland China, down -3.97% and -2.14%, followed closely by materials, down -3.66% and -1.38% in Hong Kong and Mainland China. Real estate was strong, gaining +1.39% in Hong Kong and +2.21% in Mainland China, and I expect the sector to receive additional policy support after the third plenum.

In Hong Kong, the biggest traders were Tencent, down -1.64% on no news despite being unable to buy back shares due to their upcoming second-quarter earnings release, energy giant CNOOC, down -5.16%, Alibaba, up +1.06%, Meituan, up +1.36%, and China Mobile, down -2.34%. Semiconductor stocks in both markets were among the worst subsectors. Internet names were broadly higher, with JD.com gaining +2.11%, Kuaishou gaining +0.97%, Baidu gaining +0.55% and NeEase gaining +1.39%, though Trip.com was down -0.8%. Mainland investors bought Tencent via Southbound Stock Connect, but sold the Hong Kong Tracker ETF in a rare net selling day. Large-cap financial stocks saw strong volumes in National Team ETFs, indicating market intervention today, which helped the CSI 300 turn positive, although the Shanghai and Shenzhen composites both declined. Dollar weakness overnight helped CNY-denominated assets.

Tokyo Electron shares fell 7.46% on reports that the Biden administration would extend restrictions on chip exports to its allies. As of 3/31/2024, Tokyo Electron earned $5.63 billion (44% of its revenue in China) versus $1.16 billion (9.2% in the US). If you force people to choose, you might not like the result.

“China is the greatest threat to the United States” is a statement that I find puzzling given the conflicts taking place in Europe and the Middle East. Aside from the high commercial, economic and revenue exposure of American multinationals, can you name an armed conflict that has occurred in Asia in the last forty years? I suppose politicians and the media need a scarecrow to justify their existence and attract attention to the screen.

The Hang Seng and Hang Seng Tech gained +0.06% and +0.5%, respectively, on volume of +11.37% from yesterday, which is 102% of the 1-year average. 259 stocks gained, while 217 declined. Main Board short turnover decreased -12.84% from yesterday, which is 93% of the 1-year average, as 16% of the turnover was short positions (Hong Kong short turnover includes ETF short volume, which is determined by market makers’ ETF coverage). Growth stocks and small caps outperformed value stocks and large caps. The top sectors were Healthcare +2.42%, Staples +2.36% and Real Estate +1.41%, while Energy -3.95%, Materials -3.65% and Utilities -2.3% were the worst performers. The top subsectors were Pharmaceuticals, Food/Beverage and Consumer Durables/Attractive Goods, while Energy, Semiconductors and Telecom were the worst performers. Southbound Stock Connect volumes were moderate, with mainland investors selling -$40 million worth of Hong Kong stocks and ETFs, with Tencent as a moderate net buy and the Hong Kong Tracker ETF as a moderate net sell.

Shanghai, Shenzhen and STAR Board fell -0.45%, -0.78% and -0.42% respectively on volume of +5.45% from yesterday, which is 83% of the one-year average. 1,591 stocks advanced, while 3,278 declined. Growth, value, small-cap and large-cap stocks all performed similarly. The top sectors were healthcare +2.31%, real estate +2.28% and materials +2.14%, while energy -2.08%, technology -1.64% and materials -1.32% were the worst performers. The top subsectors were insurance, alcohol and healthcare, while electronic components, motorcycles and oil/gas were the worst performers. Northbound Stock Connect volumes were subdued, with foreign investors net sellers of mainland stocks. Treasury bonds rebounded. The CNY and the Asian dollar index gained against the US dollar. Copper and steel fell.

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Last night’s performance

Last night’s exchange rates, prices and yields

• CNY for USD 7.25 vs 7.26 yesterday
• CNY for EUR 7.93 vs 7.91 yesterday
• 10-year government bond yield 2.26% vs. 2.26% yesterday
• China Development Bank 10-year bond yield: 2.33% vs. 2.33% yesterday
• Copper price -0.97%
• Steel prices -0.56%