Hong Kong Markets Fumble

All Chinese markets dropped last week on fear that the rise in oil prices would reaccelerate inflation in China and weaken the global economy. Hong Kong was particularly sensitive to the oil market, the Hang Seng Index closing the week down 2.5% while the Hang Seng China Enterprises Index was down 3.5%, compared to 0.7% for the Shanghai Composite Index. Hong Kong's performance would have been much worse if not for the strong performance on Friday. The HSI is down 5.7% from the January's high and the HSCEI, down 7%.

INDICES 1 week 4 weeks YTD
Hang Seng Index -2.5% -2.6% -0.1%
HS China Enterprises -3.7% -2.3% -3.3%
FTSE/Xinhua A50 -1.4% 2.6% 1.6%
Shanghai Composite -0.7% 4.6% 2.5%
CSI 300 -0.4% 5.3% 2.2%
US ETFs
EWH -1.2% -3.2% -2.0%
FXI -2.1% -0.5% -2.9%
PGJ -2.9% 0.4% 1.8%

Since the beginning to the year, the main drag on the Hong Kong market has come from the property developers. Property prices are still moving up but investors have been anticipating new restrictive measures to be introduced by either the Hong Kong or the Chinese governments. For Hong Kong developers, the Hong Kong budget tabled Thursday though did not call for anything drastic and the sector rebounded almost 3% on Friday. But the weakest property stocks are among the "H" shares with China Overseas Land (CAOVF.PK) and China Resources Land down 15% respectively in the past six weeks.

While "A" shares are up for the year, "H" shares have been particularly weak. The HSCEI is down 3.3% year to date with BYD leading on the downside with a drop of more than 24% due to lower than expected sales. But on a weighted basis, the weakest performers were in the insurance sector: PICC Property & Casualty, down 15% YTD, Ping An (PNGAY.PK), down 11% (off 12% in Shanghai), China Life (LFC), down 9% (no change in Shanghai). With interest rates in China expected to keep rising, the environment for insurance companies may remain difficult.

The same goes for banks as more investors discount slower profits growth. For the first two months on the year, ICBC and Minsheng Bank are the only bank constituents out of 8 among HSCEI to be positive, both with a slightly above 1% rise. The worst being China Merchants Bank (CIHHF.PK), off 6.2% for the period (down 0.5% in Shanghai). Only one airline is a constituent of the index and the rising cost of fuel has certainly clipped the wings of Air China (AIRYY.PK), down 19% (down 15% in Shanghai). The airline stock was down 14% last week alone.

With banks and insurance companies representing 56% of the total assets of HSCEI and 44% of iShares FXI's assets, no rebound could be expected until these stocks start performing.

To the benefit of iShares FXI, some of the best performers among "H" shares have been China Telecom (CHA), up 10% YTD and China Unicom (CHU), up 21%. Both respectively represent more than 4% of FXI's assets Unfortunately China Mobile (CHL), which account for almost 10% of the ETF, has not done so well and is down 6% on the year.
SECTORS – CHINA 1 week 4 weeks YTD
CSI300 Energy -0.2% 5.1% -0.9%
CSI300 Materials 1.7% 12.5% 2.7%
CSI300 Industrials -1.6% 4.0% 6.2%
CSI300 Cons. Discretionary 1.7% 8.4% 6.0%
CSI300 Cons. Staples -0.7% 5.5% -0.9%
CSI300 Healthcare -0.6% 3.8% -4.9%
CSI300 Financials -1.5% 2.5% 1.0%
CSI300 Technology 2.6% 7.6% -0.0%
CSI300 Telecom 1.4% 5.9% 9.3%
CSI300 Utilities -0.2% 3.8% 2.2%
SECTORS – HONG KONG 1 week 4 weeks YTD
HS Financials -2.8% -0.5% 1.0%
HS Utilities 1.1% -0.1% -0.5%
HS Property -1.2% -7.9% -4.9%
HS Commerce & Industry -2.8% -3.8% -0.1%

On the mainland, heavy weighted sectors industrials and financials pulled the CSI300 down last week despite good performance by materials. For the first time this year, Beijing increased the price of retail gasoline and diesel. Despite the move, energy stocks lost slightly. The worst casualties were to be found among railway stocks: China Security and Surveillance (CSR) and China Railway (CWYCF.PK), down respectively 8.3% and 6.9% (both down 10% in Hong Kong). Despite the downbeat mood, materials did well lead by Jinduicheng Molybdenum, up 17% and Yantai Wanhua Polyurethanes, up 11.7%.

On a year to date basis, mainland banks have not been the drag on the CSI300 index as they have been on the HSCEI. The CSI300 Banks Index is up 1.9% on the year. Fujian's Industrial Bank clocked in a performance of 8% in the first two months of the year and China Construction Bank (CICHF.PK), which is down 4% in Hong Kong for the year, is up 6% in Shanghai. The divergence between banking stock prices in Hong Kong and in Shanghai seems to be a question of perception. Hong Kong and foreign investors may simply be more skeptical about the Chinese banks' good standing.

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. iShares FXI tracks the FTSE/Xinhua 25 Index which includes the 25 largest mainland companies listed in Hong Kong.