Shanghai appears to be pulling a Lunar New Year rally with the Chinese indices gaining ground at the end of the week. The Shanghai Composite was up 1.4% while the CSI300 gained 1.8%. Trading in Shanghai will be limited to Monday and Tuesday this week and the markets will not reopen before Wednesday February 9. Hong Kong, down on the week, will be closed Thursday and Friday. The short week could give a clue on what direction the markets are likely to take at the beginning of the Year of the Rabbit.
| INDICES | 1 week | 4 weeks | YTD |
| Hang Seng Index | -1.1% | 2.5% | 2.5% |
| HS China Enterprises | -1.3% | -1.0% | -1.0% |
| FTSE/Xinhua A50 | 1.2% | -0.9% | -0.9% |
| Shanghai Composite | 1.4% | -2.0% | -2.0% |
| CSI 300 | 1.8% | -2.9% | -2.9% |
| US ETFs | |||
| EWH | -2.3% | 1.3% | 1.3% |
| FXI | -2.8% | -2.5% | -2.5% |
| PGJ | -1.1% | 1.4% | 1.4% |
Investors may need to take time to assess the situation. Since the November high the Shanghai Composite Index is down 13% and year to date down 2%. From its post financial crisis high reached in August 2009, the index is down 20% despite the country's strong economic performance. The US market with less economic bravado is at its post crisis high. Seen from the other end though, the Shanghai Composite Index has gained 16% since its July 2010 low., a noticeable recovery. Brokers are naturally claiming that the Chinese market will bounce in the Year of the Rabbit. The latest one, Citic Securities, claims that current valuations are at levels last seen during the financial crisis in 2008. The CSI300 is currently trading at 20 times trailing earnings.
| SECTORS – CHINA | 1 week | 4 weeks | YTD |
| CSI300 Energy | 1.0% | -5.7% | -5.7% |
| CSI300 Materials | 1.5% | -8.7% | -8.7% |
| CSI300 Industrials | 4.6% | 2.1% | 2.1% |
| CSI300 Cons. Discretionary | 2.7% | -2.1% | -2.1% |
| CSI300 Cons. Staples | 1.1% | -6.1% | -6.1% |
| CSI300 Healthcare | 1.9% | -8.3% | -8.3% |
| CSI300 Financials | 0.1% | -1.5% | -1.5% |
| CSI300 Technology | 1.3% | -7.1% | -7.1% |
| CSI300 Telecom | 7.1% | 3.2% | 3.2% |
| CSI300 Utilities | 2.3% | -1.5% | -1.5% |
| SECTORS – HONG KONG | 1 week | 4 weeks | YTD |
| HS Financials | -1.7% | 1.5% | 1.5% |
| HS Utilities | -0.3% | -0.4% | -0.4% |
| HS Property | -1.9% | 3.3% | 3.3% |
| HS Commerce & Industry | -0.2% | 3.9% | 3.9% |
Maybe as a prelude of things to come, investors piled in the industrials sector last week on speculation the shares of heavy industry companies are undervalued given their growth prospects. The CSI300 Industrials sub index was up 4.6%. China National Chemical Engineering was up 28.4%, the heavy building company won a contract worth 8.3 billion yuan for a coal-to-gas project in Inner Mongolia. The stock is up 36% in nine trading days. In a similar field, China First Heavy Industries rose 21.1% in seven trading days. Taiyuan Heavy Industry, up 26.6% in eight trading days. The rise in commodities prices on Friday in New York will likely boost energy and materials stocks which did well last week. Energy stocks were up 1% while materials rose 1.5%. The consumer discretionary sector gained 2.7%, largely from the auto manufacturers who are expected to show strong sales in the first quarter. SAIC was up 8.1% on the week.
Hong Kong was off 1.1% on the week, dragged down by developers following new rules in China. Shanghai has finally introduced its property tax and the central government raised the minimum down-payment for second-home purchases. The Hang Seng Property sub index was down 1.9%. Sino Land, with its heavy involvement in China, led the pack, down 4.2%. Mainland developers China Overseas and China Resources Land were both off 3.5%.
Mainland stocks in Hong Kong did not do as well as the A shares in China. The Hang Seng China Enterprises Index was down 1.3%. Guangzhou R&F Properties lost 7.4%. Among the worst performers were the shipping companies China Shipping and China COSCO, down 6.2% and 5.8% respectively on no particular news except that China Shipping announced it expects higher 2010 profits. Insurance and banking stocks were all down on the week. PICC dropped 4.2%; on the January 19 the non-life insurer announced its profits had more than doubled. The worst off among banks was China Merchants Bank down 3.9%. The bright star of the week was Sinopec up 5.4%.
Sinopec was also the best performer among FXI constituents but the ETF's overall performance was even worst than the HSCEI. The counter came down 2.8% on the week, dragged down by another oil company CNOOC which was off 7.1% on the week, most of it on Friday after forecasting slower production growth. As for the HSCEI, FXI was also affected by China COSCO and the weakness among banks.
The Shanghai Composite Index is the broadest base index encompassing all listed A and B shares listed in Shanghai. The CSI300 comprises the 300 largest A shares listed in Shanghai and Shenzhen. The Hang Seng China Enterprises Index covers 40 “H” shares issued by mainland companies listed in Hong Kong.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. EWH tracks the MSCI Hong Kong Index which is substantially different from the Hang Seng Index. FXI tracks the FTSE/Xinhua 25 Index which includes the 25 largest mainland companies listed in Hong Kong.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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