Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<p>Slower near-term growth may be risk asset positive. A slower growth trajectory may engender reduced inflation expectations which could translate into lower Treasury yields and a lower dollar value. This could produce a longer, more sustainable, recovery rather than the current soufflé economy track. That would be Emerging Market positive. </p><p>Germany announced, then retracted, plans to institute a tougher lock-down over the Easter weekend. This raised fears that a third wave of Coronavirus cases could impact demand globally. This may have contributed to a flight to safety and increased bearish pressure across risk assets as investors re-assessed near term GDP expectations.</p><p>Risk assets have been discounting an inflationary surge in growth ahead. However, as US Covid-19 cases rise and European vaccination programs lag, prospects for US Q1 and Q2 GDP are deteriorating by the day. Ironically, various supply-chain disruptions, which could negatively impact production in coming month, may slow growth more than it boosts inflation. This could also be Emerging Market positive.</p><p>US Treasuries continued their sawtooth upwards pattern of declining then rising. Transitory and more permanent factors impacted US Treasury and risk-asset returns this week. Notably, real rates remained steady.</p><p>Transitory effects included supply plus month-end and quarter-end rebalancing which put pressure on yields. More permanent factors likely included less draconian SLR exemption interpretations and possibly the economic demand impact of vaccine distribution difficulties as Covid-19 infections rise. </p><p>Amongst Asia EM banks, India bank equity continued its underperformance while Thai banks remained relatively unchanged following notable banking-related announcements in each country.</p><p>The decline in India’s bank shares exceeded others in Asia. The interest-on-interest accrual decision, and the valuation of Additional Tier 1 bond guidance by the Supreme Court and the Securities &amp; Exchange Board of India (SEBI), respectively, are particularly onerous and damaging to bank valuations.</p><p>In Asia, short duration bank bonds outperformed although most bank notes generated total positive returns on Treasury price strength.  Liquidity in Turkish bank bonds dried-up as the fall-out from the unexpected firing of the Central Bank Governor last week.</p><p><strong>Market Outlook</strong>: The question for next week is how much portfolio re-balancing out of stocks and into bonds has already occurred. This normally would take place during the last week of the quarter. However, with month-end just before Easter market holidays, trading conditions may be relatively thin next week. As such, portfolio adjustments may have been pulled forward. From a risk asset perspective, it may be wise to jump back into the market before the quarter-end to get ahead of the pack. From 1 April, with the start of Japan’s fiscal year, Japanese investors are typically net buyers of risk assets over the following months. This adds to a seasonality affect that usually pushes risk assets higher while safe-haven securities retreat.</p>

Slower near-term growth may be risk asset positive. A slower growth trajectory may engender reduced inflation expectations which could translate into lower Treasury yields and a lower dollar value. This could produce a longer, more sustainable, recovery rather than the current soufflé economy track. That would be Emerging Market positive. Germany announced, then retracted, plans to institute a tougher lock-down over the Easter weekend. This raised fears that a third wave of Coronavirus cases could impact demand globally. This may have contributed to a flight to safety and increased bearish pressure across risk assets as investors re-assessed near term GDP expectations.Risk assets have been discounting an inflationary surge in growth ahead. However, as US Covid-19 cases rise and European vaccination programs lag, prospects for US Q1 and Q2 GDP are deteriorating by the day. Ironically, various supply-chain disruptions, which could negatively impact production in coming month, may slow growth more than it boosts inflation. This could also be Emerging Market positive.US Treasuries continued their sawtooth upwards pattern of declining then rising. Transitory and more permanent factors impacted US Treasury and risk-asset returns this week. Notably, real rates remained steady.Transitory effects included supply plus month-end and quarter-end rebalancing which put pressure on yields. More permanent factors likely included less draconian SLR exemption interpretations and possibly the economic demand impact of vaccine distribution difficulties as Covid-19 infections rise. Amongst Asia EM banks, India bank equity continued its underperformance while Thai banks remained relatively unchanged following notable banking-related announcements in each country.The decline in India’s bank shares exceeded others in Asia. The interest-on-interest accrual decision, and the valuation of Additional Tier 1 bond guidance by the Supreme Court and the Securities &amp; Exchange Board of India (SEBI), respectively, are particularly onerous and damaging to bank valuations.In Asia, short duration bank bonds outperformed although most bank notes generated total positive returns on Treasury price strength.  Liquidity in Turkish bank bonds dried-up as the fall-out from the unexpected firing of the Central Bank Governor last week.Market Outlook: The question for next week is how much portfolio re-balancing out of stocks and into bonds has already occurred. This normally would take place during the last week of the quarter. However, with month-end just before Easter market holidays, trading conditions may be relatively thin next week. As such, portfolio adjustments may have been pulled forward. From a risk asset perspective, it may be wise to jump back into the market before the quarter-end to get ahead of the pack. From 1 April, with the start of Japan’s fiscal year, Japanese investors are typically net buyers of risk assets over the following months. This adds to a seasonality affect that usually pushes risk assets higher while safe-haven securities retreat.

Bank Credit Weekly: Growth Concerns May Be Total Return Positive

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Hang Seng China Enterprises Index / Event-Driven

<p>The announcement of 2020 full year results is bringing some certainty to the HSCEI 2021 dividend index points. With <a href="https://www.smartkarma.com/entities/bank-of-communications-co-h" target="_blank" data-smartkarma-citation="entities:659:1" rel="noopener">Bank Of Communications Co H (3328 HK)</a>, <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-h" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">ICBC (H) (1398 HK)</a> and <a href="https://www.smartkarma.com/entities/china-construction-bank-h" target="_blank" data-smartkarma-citation="entities:45:1" rel="noopener">China Construction Bank H (939 HK)</a> announcing results (and dividends) today, and <a href="https://www.smartkarma.com/entities/postal-savings-bank-of-china" target="_blank" data-smartkarma-citation="entities:22848:1" rel="noopener">Postal Savings Bank of China (1658 HK)</a>, <a href="https://www.smartkarma.com/entities/agricultural-bank-of-china-limited" target="_blank" data-smartkarma-citation="entities:1120:1" rel="noopener">Agricultural Bank Of China (1288 HK)</a> and <a href="https://www.smartkarma.com/entities/bank-of-china-ltd-h" target="_blank" data-smartkarma-citation="entities:656:1" rel="noopener">Bank Of China Ltd (H) (3988 HK)</a> announcing on Monday and Tuesday next week, over 85% of the 2021 dividend index points will be known by end of the month.</p><p>With <a href="https://www.smartkarma.com/entities/baidu-inc-a55ca720-5968-48f0-8194-ac94390d065c" target="_blank" data-smartkarma-citation="entities:32212:1" rel="noopener">Baidu (9888 HK)</a> included in the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> at the close of trading on 8 April, potential changes to the index at the June review that will be implemented at the close on 4 June, and capping changes that will be implemented at 8% of the index weight for all stocks at the June review, the dividend ex-date for the stocks (and banks in particular) will play a big role in determining the fair value of the 2021 dividend futures.</p><p>With the SEC pushing forward with the Holding Foreign Companies Accountable Act, US listed Chinese stocks could look to bring forward their plans to Secondary List on the <a href="https://www.smartkarma.com/entities/hong-kong-exchanges-clearing" target="_blank" data-smartkarma-citation="entities:490:1" rel="noopener">HKEX (388 HK)</a>. <a href="https://www.smartkarma.com/entities/bilibili-inc-83a27302-cd7d-4e6a-a1de-bcf93eb022c3" target="_blank" data-smartkarma-citation="entities:32215:1" rel="noopener">Bilibili Inc (9626 HK)</a> lists on Monday and media indicates that other Chinese companies are evaluating listing in Hong Kong. <a href="https://www.smartkarma.com/entities/jd-logistics" target="_blank" data-smartkarma-citation="entities:31500:1" rel="noopener">JD Logistics (JDL HK)</a> has already filed papers to list in Hong Kong. Then there are companies like <a href="https://www.smartkarma.com/entities/didi-chuxing-inc" target="_blank" data-smartkarma-citation="entities:27467:1" rel="noopener">DiDi Chuxing (1284375D CH)</a>, <a href="https://www.smartkarma.com/entities/bytedance-technology" target="_blank" data-smartkarma-citation="entities:27936:1" rel="noopener">ByteDance (1460967D CH)</a> and <a href="https://www.smartkarma.com/entities/ant-group-co-ltd" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Financial Services Group (6688 HK)</a> that could primary list in Hong Kong in the near future. While this will have minimal impact on the 2021 dividends, the impact on the 2022 and later dividend futures would be a lot higher.</p><p>We see little downside from the current market on the HSCEI 2021 dividend futures, but believe that the HSCEI 2021/22 dividend steepener is trading too high. Potential changes to the index constituents should put downward pressure on the 2022 dividends with low dividend yield or zero dividend paying companies joining the index at high index weights, and high dividend paying companies being deleted from the index.</p>

The announcement of 2020 full year results is bringing some certainty to the HSCEI 2021 dividend index points. With Bank Of Communications Co H (3328 HK), ICBC (H) (1398 HK) and China Construction Bank H (939 HK) announcing results (and dividends) today, and Postal Savings Bank of China (1658 HK), Agricultural Bank Of China (1288 HK) and Bank Of China Ltd (H) (3988 HK) announcing on Monday and Tuesday next week, over 85% of the 2021 dividend index points will be known by end of the month.With Baidu (9888 HK) included in the Hang Seng China Enterprises Index (HSCEI INDEX) at the close of trading on 8 April, potential changes to the index at the June review that will be implemented at the close on 4 June, and capping changes that will be implemented at 8% of the index weight for all stocks at the June review, the dividend ex-date for the stocks (and banks in particular) will play a big role in determining the fair value of the 2021 dividend futures.With the SEC pushing forward with the Holding Foreign Companies Accountable Act, US listed Chinese stocks could look to bring forward their plans to Secondary List on the HKEX (388 HK). Bilibili Inc (9626 HK) lists on Monday and media indicates that other Chinese companies are evaluating listing in Hong Kong. JD Logistics (JDL HK) has already filed papers to list in Hong Kong. Then there are companies like DiDi Chuxing (1284375D CH), ByteDance (1460967D CH) and Ant Financial Services Group (6688 HK) that could primary list in Hong Kong in the near future. While this will have minimal impact on the 2021 dividends, the impact on the 2022 and later dividend futures would be a lot higher.We see little downside from the current market on the HSCEI 2021 dividend futures, but believe that the HSCEI 2021/22 dividend steepener is trading too high. Potential changes to the index constituents should put downward pressure on the 2022 dividends with low dividend yield or zero dividend paying companies joining the index at high index weights, and high dividend paying companies being deleted from the index.

HSCEI Dividend Futures: June Index Review, Bank Divs, HFCAA - Sell the 2021/22 Steepener

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

China Merchants Bank H / Equity Bottom-Up

<p><strong><em>*Weak 4Q20 Bottom-Line:</em></strong> China Merchants Bank (3968.HK) [CMB] pre-announced a poor set of 4Q20 results. On March 19, 2020, the finals were disclosed and the results were even uglier than anticipated. While its true that net profit declined CNY 6.1 bn (22.7%) on a linked quarter basis to CNY 20.9 bn –despite having its tax rate decline 790 bp to 15.6% over the period, core operating results came in at just CNY 13.9 bn – declining CNY 9.3 bn or 40.0% linked quarter;  and </p><p><strong><em>*Best Retail Franchise Hitting Credit Wall:</em></strong> While CMB has the best retail franchise in mainland China, credit risk has substantially increased in 4Q20. More worrisome is the net new NPL increase of CNY 14.8 bn, representing an annualized increase in net new NPLs of 104.7%. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 213% - suggesting even the mighty are falling. </p>

*Weak 4Q20 Bottom-Line: China Merchants Bank (3968.HK) [CMB] pre-announced a poor set of 4Q20 results. On March 19, 2020, the finals were disclosed and the results were even uglier than anticipated. While its true that net profit declined CNY 6.1 bn (22.7%) on a linked quarter basis to CNY 20.9 bn –despite having its tax rate decline 790 bp to 15.6% over the period, core operating results came in at just CNY 13.9 bn – declining CNY 9.3 bn or 40.0% linked quarter;  and *Best Retail Franchise Hitting Credit Wall: While CMB has the best retail franchise in mainland China, credit risk has substantially increased in 4Q20. More worrisome is the net new NPL increase of CNY 14.8 bn, representing an annualized increase in net new NPLs of 104.7%. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 213% - suggesting even the mighty are falling. 

China Merchants Bank – Pulling On All Levers

<p>It is difficult to make a truly bullish argument on behalf of US Treasuries now. The bottom line is it is still not time to buy duration. Risk yes. Duration no. Emerging Markets? It depends.</p><p>The Fed re-anchored short-term, front-end, interest rate expectations via the Dot Plot, the Chairman’s comments, and actions to aid the overnight rate market. Overall, it was a better-than-expected communique from the Fed. With a spike of inflation next on the horizon, it may be a hard act to follow.</p><p>Inflation can hide a host of sins. It can benefit financials and borrowers, but not the vulnerable in society, as inflation is a regressive tax. From a financial market perspective, it is difficult to envision a near-term spike in inflation as being credit positive. Market interest rates may overshoot as insurance against out-of-control inflation expectations. Risk assets, in particular Emerging Market assets, could over-react while the Fed under-reacts.</p><p>The risk is that US policy makers are “fighting the last war.” Rather than continued curve steepening, we may see a period of consolidation, as short-end interest rate expectations rise at a faster rate,  essentially flattening the yield curve. We expect the Fed to be on watch for this.</p><p>For financials, we anticipate improved net interest income levels during Q2 as both volume and yields rise. This would also result in higher non-interest income revenues as fee income soars from increased transactions. However, trading activity may see some institutions off-sides in terms of mistiming the market. We believe that it is better to be in banks with solid core operating revenues, rather than firms that have rediscovered and become over-reliant, once again, on trading activity.</p><p>The recent back-up in US interest rates may be an opportunity to reload in some Emerging Markets (EM), just not in Turkey. Central bank independence is shattered once again by the firing of the Central Bank Governor. Only four months into the role, the former Governor is being replaced by an interest rate dove. We expect a large correction in Turkish bank bond as the markets digest this implausible reality next week. It may be better to focus on opportunities off the radar. EM high yield, but low duration, sovereign and more frontier bonds may be the answer. We cite a few inside.</p><p>In terms of recent performance, in Asia, short duration and long risk bank bonds kept pace with Treasury weakness to end the week unchanged on a total return basis. Meanwhile, longer-dated European bank Contingent Capital (CoCos) managed to keep pace with Treasury market weakness to end the week unchanged on a total return basis. Each Additional Tier 1 bond callable in 2030 and 2031 tightened by 10 basis points. Given the simultaneous tightening, we ascribe this performance as due a restart of the AstraZeneca shot across the lagging EU’s vaccine effort. A third round of lockdowns may unwind these gains next week. </p><p><strong>Market Outlook</strong>: The US economy may run very hot before we see a change in Fed policy regarding short-term interest rates and the US dollar should remain stronger than analysts forecasted at year-end. Broadly, this is not Emerging Market friendly; however, a strong US economic rebound should benefit EM and European financials. First, we may need to get past the upcoming inflation spike.</p>

It is difficult to make a truly bullish argument on behalf of US Treasuries now. The bottom line is it is still not time to buy duration. Risk yes. Duration no. Emerging Markets? It depends.The Fed re-anchored short-term, front-end, interest rate expectations via the Dot Plot, the Chairman’s comments, and actions to aid the overnight rate market. Overall, it was a better-than-expected communique from the Fed. With a spike of inflation next on the horizon, it may be a hard act to follow.Inflation can hide a host of sins. It can benefit financials and borrowers, but not the vulnerable in society, as inflation is a regressive tax. From a financial market perspective, it is difficult to envision a near-term spike in inflation as being credit positive. Market interest rates may overshoot as insurance against out-of-control inflation expectations. Risk assets, in particular Emerging Market assets, could over-react while the Fed under-reacts.The risk is that US policy makers are “fighting the last war.” Rather than continued curve steepening, we may see a period of consolidation, as short-end interest rate expectations rise at a faster rate,  essentially flattening the yield curve. We expect the Fed to be on watch for this.For financials, we anticipate improved net interest income levels during Q2 as both volume and yields rise. This would also result in higher non-interest income revenues as fee income soars from increased transactions. However, trading activity may see some institutions off-sides in terms of mistiming the market. We believe that it is better to be in banks with solid core operating revenues, rather than firms that have rediscovered and become over-reliant, once again, on trading activity.The recent back-up in US interest rates may be an opportunity to reload in some Emerging Markets (EM), just not in Turkey. Central bank independence is shattered once again by the firing of the Central Bank Governor. Only four months into the role, the former Governor is being replaced by an interest rate dove. We expect a large correction in Turkish bank bond as the markets digest this implausible reality next week. It may be better to focus on opportunities off the radar. EM high yield, but low duration, sovereign and more frontier bonds may be the answer. We cite a few inside.In terms of recent performance, in Asia, short duration and long risk bank bonds kept pace with Treasury weakness to end the week unchanged on a total return basis. Meanwhile, longer-dated European bank Contingent Capital (CoCos) managed to keep pace with Treasury market weakness to end the week unchanged on a total return basis. Each Additional Tier 1 bond callable in 2030 and 2031 tightened by 10 basis points. Given the simultaneous tightening, we ascribe this performance as due a restart of the AstraZeneca shot across the lagging EU’s vaccine effort. A third round of lockdowns may unwind these gains next week. Market Outlook: The US economy may run very hot before we see a change in Fed policy regarding short-term interest rates and the US dollar should remain stronger than analysts forecasted at year-end. Broadly, this is not Emerging Market friendly; however, a strong US economic rebound should benefit EM and European financials. First, we may need to get past the upcoming inflation spike.

Bank Credit Weekly: Inflation, the Next Market Challenge or Opportunity?

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Quantitative Analysis

<div>
<p>Spreads narrowed sharply this week with 68 of 100 liquid spreads narrowing, 32 widening. The big winner on the week was Consumer narrowing 2.46% as every spread in the space narrowed despite five of six stocks falling in Hs (i.e. As fell even more). </p>
<p>The <a href="https://www.smartkarma.com/entities/shandong-chenming-paper-h" target="_blank" data-smartkarma-citation="entities:13775:1" rel="noopener">Shandong Chenming Paper H (1812 HK)</a> situation intruded on the H/S spreads this week as the decision to convert the B shares to Hs (described by <a href="https://www.smartkarma.com/profiles/david-blennerhassett" target="_blank" data-smartkarma-citation="accounts:840" rel="noopener">David Blennerhassett</a> in <a href="https://www.smartkarma.com/insights/shandong-chenming-paper-1812-hk-the-h-b-convergence-trade" target="_blank" data-smartkarma-citation="insights:49247" rel="noopener">Shandong Chenming Paper (1812 HK): The H/B Convergence Trade</a> mid-week) caused ructions in the H/A spread.</p>
<p>But overall, it was a decent week. Only two sectors saw spreads widen (Energy and Utilities), both accompanied by net southbound selling in the week to Wednesday (the last day to which we have granular name-by-name data).</p>
<table class="table table-striped"><tbody>
<tr>
<td><p>Sector</p></td>
<td style="text-align: right;"><p>Last Week</p></td>
<td style="text-align: right;"><p>Previous Week</p></td>
<td style="text-align: right;"><p>3wks Ago</p></td>
<td style="text-align: right;"><p>4wks Ago</p></td>
</tr>
<tr>
<td><p>Consumer</p></td>
<td style="text-align: right;"><p>+ 2.46%</p></td>
<td style="text-align: right;"><p>+ 0.74%</p></td>
<td style="text-align: right;"><p>-  0.14%</p></td>
<td style="text-align: right;"><p>-  1.65%</p></td>
</tr>
<tr>
<td><p>Energy</p></td>
<td style="text-align: right;"><p>-  0.39%</p></td>
<td style="text-align: right;"><p>-  0.56%</p></td>
<td style="text-align: right;"><p>-  0.36%</p></td>
<td style="text-align: right;"><p>+ 0.67%</p></td>
</tr>
<tr>
<td><p>Financials &amp; Real Estate</p></td>
<td style="text-align: right;"><p>+ 0.92%</p></td>
<td style="text-align: right;"><p>+ 0.53%</p></td>
<td style="text-align: right;"><p>+ 1.19%</p></td>
<td style="text-align: right;"><p>-  1.12%</p></td>
</tr>
<tr>
<td><p>Health Care &amp; Info Tech</p></td>
<td style="text-align: right;"><p>+ 1.50%</p></td>
<td style="text-align: right;"><p>+ 2.29%</p></td>
<td style="text-align: right;"><p>-  0.54%</p></td>
<td style="text-align: right;"><p>-  2.86%</p></td>
</tr>
<tr>
<td><p>Industrials</p></td>
<td style="text-align: right;"><p>+ 1.19%</p></td>
<td style="text-align: right;"><p>+ 0.15%</p></td>
<td style="text-align: right;"><p>-  0.42%</p></td>
<td style="text-align: right;"><p>-  1.20%</p></td>
</tr>
<tr>
<td><p>Materials</p></td>
<td style="text-align: right;"><p>+ 1.42%</p></td>
<td style="text-align: right;"><p>+ 0.61%</p></td>
<td style="text-align: right;"><p>-  0.33%</p></td>
<td style="text-align: right;"><p>-  0.84%</p></td>
</tr>
<tr>
<td><p>Utilities</p></td>
<td style="text-align: right;"><p>-  0.91%</p></td>
<td style="text-align: right;"><p>-  0.87%</p></td>
<td style="text-align: right;"><p>-  1.25%</p></td>
<td style="text-align: right;"><p>-  0.14%</p></td>
</tr>
<tr>
<td><p><strong>Sector Average</strong></p></td>
<td style="text-align: right;"><p><strong>+ 0.88%</strong></p></td>
<td style="text-align: right;"><p><strong>+ 0.41%</strong></p></td>
<td style="text-align: right;"><p><strong>-  0.26%</strong></p></td>
<td style="text-align: right;"><p><strong>-  1.02%</strong></p></td>
</tr>
<tr>
<td><p><strong>All Market Average</strong></p></td>
<td style="text-align: right;"><p><strong>+ 0.96%</strong></p></td>
<td style="text-align: right;"><p><strong>+ 0.59%</strong></p></td>
<td style="text-align: right;"><p><strong>+ 0.05%</strong></p></td>
<td style="text-align: right;"><p><strong>-  1.22%</strong></p></td>
</tr>
</tbody></table>
</div><div><div></div></div><p><span>10-day cross-market spread volatility continues to fall. This past week ended at 20% down from 23% in the ten days to 12 March. This is down off highs in the low 30s a couple weeks ago, but the long-term average is still under 20%.</span></p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/195/770/original/Screenshot+2021-03-20+at+8.25.25+PM.png?1616243179" class="editor-image img-responsive" data-smartkarma-image-id="195770"></figure></section><div><div>
<hr>
<h3>The H/A Spread Market</h3>
</div></div><div><p>The past week has seen H-shares come off, but spreads narrow as Hs outperformed their As pretty dramatically. Interestingly, the narrower the spread, to start with, the better the performance on the week. Ideally, spread players want to see that red line sloping downward from upper left to lower right because even a big spread movement for a 70% discount stock means very large performance is needed to catch up. </p></div><div><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/195/724/original/Screenshot+2021-03-20+at+5.41.02+PM.png?1616233277" class="editor-image img-responsive" data-smartkarma-image-id="195724"></figure></section></div><div>
<p>The average discount has started tightening again and we are at 38% which is where the spread rebounded to un Q2 of 2020 after widening in the Covid-crash. </p>
<p>In 2019, spreads spent a fairly long time in the 34-36% average. </p>
</div><section><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/195/728/original/Screenshot+2021-03-20+at+5.44.03+PM.png?1616233457" class="editor-image img-responsive" data-smartkarma-image-id="195728"></figure></section></section><hr><div><div><h2>Last Week's Recommendations</h2></div></div><div><ul style="list-style-type: disc;">
<li>There were 81 recommendations last week.</li>
<li>Positive alpha returned. There were 49 long spreads and 32 short spreads which gained on average 27bp against the delta-neutral gain of 0.20%, indicating spread alpha of 7bp on the week. This is back to a good trend after a horrible week the week before.</li>
<li>There are <em>nearly</em> 80 recommendations this week (turnover remains low).  </li>
</ul></div><hr><div><div><h2>Consumer Sector</h2></div></div><div>
<p>The first sector discussed is Consumer. It was a complex week there. </p>
<ul>
<li>Five out of six H-shares were down on the week. <a href="https://www.smartkarma.com/entities/tsingtao-brewery-co-ltd-h" target="_blank" data-smartkarma-citation="entities:1296:1" rel="noopener">Tsingtao Brewery Co Ltd H (168 HK)</a> was up 10.6%.</li>
<li>All six spreads narrowed with the average H-share outperformance of A at 2.46%. It was a strong week for every spread in the group. </li>
<li>Normally when this happens, there is significant net selling by Southbound. This week saw net buying of HK$270mm to Wednesday, halting four straight weeks prior of net selling. </li>
</ul>
</div><div></div><div><div><div class="content-highlight">
<p>Last week, I recommended keeping the shorts (<a href="https://www.smartkarma.com/entities/byd-co-ltd-h" target="_blank" data-smartkarma-citation="entities:20962:1" rel="noopener">BYD (1211 HK)</a> and <a href="https://www.smartkarma.com/entities/fuyao-glass-industry-group-co-ltd" target="_blank" data-smartkarma-citation="entities:330:1" rel="noopener">Fuyao Glass Industry Group (3606 HK)</a>) and the long in <a href="https://www.smartkarma.com/entities/guangzhou-automobile-group-co-ltd" target="_blank" data-smartkarma-citation="entities:11082:1" rel="noopener">Guangzhou Automobile Group (2238 HK)</a> and adding a long on <a href="https://www.smartkarma.com/entities/hisense-home-appliances-group-co-ltd-h" target="_blank" data-smartkarma-citation="entities:20107:1" rel="noopener">Hisense Home Appliances Group Co., Ltd. H (921 HK)</a> H vs A.</p>
<p>Those trades lost an average of 0.51% last week in spread terms after losing 29bp the week before, and 16bp the week before that. Despite three losing weeks in a row, positioning in the sector is still up 262bp in four weeks. </p>
<p>This week's trade recommendations are below the fold.</p>
</div></div></div><div><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/195/729/original/Screenshot+2021-03-20+at+5.44.45+PM.png?1616233498" class="editor-image img-responsive" data-smartkarma-image-id="195729"></figure></section></div><div><section>For this week's recommendations on Consumer, and discussion of the Energy, Financials &amp; Real Estate, Health Care, Tech, Industrials, Materials, and Utilities sectors, and all trade recommendations, please read on.</section></div>


Spreads narrowed sharply this week with 68 of 100 liquid spreads narrowing, 32 widening. The big winner on the week was Consumer narrowing 2.46% as every spread in the space narrowed despite five of six stocks falling in Hs (i.e. As fell even more). 
The Shandong Chenming Paper H (1812 HK) situation intruded on the H/S spreads this week as the decision to convert the B shares to Hs (described by David Blennerhassett in Shandong Chenming Paper (1812 HK): The H/B Convergence Trade mid-week) caused ructions in the H/A spread.
But overall, it was a decent week. Only two sectors saw spreads widen (Energy and Utilities), both accompanied by net southbound selling in the week to Wednesday (the last day to which we have granular name-by-name data).


Sector
Last Week
Previous Week
3wks Ago
4wks Ago


Consumer
+ 2.46%
+ 0.74%
-  0.14%
-  1.65%


Energy
-  0.39%
-  0.56%
-  0.36%
+ 0.67%


Financials &amp; Real Estate
+ 0.92%
+ 0.53%
+ 1.19%
-  1.12%


Health Care &amp; Info Tech
+ 1.50%
+ 2.29%
-  0.54%
-  2.86%


Industrials
+ 1.19%
+ 0.15%
-  0.42%
-  1.20%


Materials
+ 1.42%
+ 0.61%
-  0.33%
-  0.84%


Utilities
-  0.91%
-  0.87%
-  1.25%
-  0.14%


Sector Average
+ 0.88%
+ 0.41%
-  0.26%
-  1.02%


All Market Average
+ 0.96%
+ 0.59%
+ 0.05%
-  1.22%


10-day cross-market spread volatility continues to fall. This past week ended at 20% down from 23% in the ten days to 12 March. This is down off highs in the low 30s a couple weeks ago, but the long-term average is still under 20%.

The H/A Spread Market
The past week has seen H-shares come off, but spreads narrow as Hs outperformed their As pretty dramatically. Interestingly, the narrower the spread, to start with, the better the performance on the week. Ideally, spread players want to see that red line sloping downward from upper left to lower right because even a big spread movement for a 70% discount stock means very large performance is needed to catch up. 
The average discount has started tightening again and we are at 38% which is where the spread rebounded to un Q2 of 2020 after widening in the Covid-crash. 
In 2019, spreads spent a fairly long time in the 34-36% average. 
Last Week's Recommendations
There were 81 recommendations last week.
Positive alpha returned. There were 49 long spreads and 32 short spreads which gained on average 27bp against the delta-neutral gain of 0.20%, indicating spread alpha of 7bp on the week. This is back to a good trend after a horrible week the week before.
There are nearly 80 recommendations this week (turnover remains low).  
Consumer Sector
The first sector discussed is Consumer. It was a complex week there. 

Five out of six H-shares were down on the week. Tsingtao Brewery Co Ltd H (168 HK) was up 10.6%.
All six spreads narrowed with the average H-share outperformance of A at 2.46%. It was a strong week for every spread in the group. 
Normally when this happens, there is significant net selling by Southbound. This week saw net buying of HK$270mm to Wednesday, halting four straight weeks prior of net selling. 


Last week, I recommended keeping the shorts (BYD (1211 HK) and Fuyao Glass Industry Group (3606 HK)) and the long in Guangzhou Automobile Group (2238 HK) and adding a long on Hisense Home Appliances Group Co., Ltd. H (921 HK) H vs A.
Those trades lost an average of 0.51% last week in spread terms after losing 29bp the week before, and 16bp the week before that. Despite three losing weeks in a row, positioning in the sector is still up 262bp in four weeks. 
This week's trade recommendations are below the fold.
For this week's recommendations on Consumer, and discussion of the Energy, Financials &amp; Real Estate, Health Care, Tech, Industrials, Materials, and Utilities sectors, and all trade recommendations, please read on.

Quiddity Weekly H/A: Consumer Strong, Spreads Narrowing Masks A-Share Weakness

China

Bank of Communications Co.,Ltd. provides banking services. The Company offers deposits, loans, domestic settlement, currency trading, and other services. Bank of Communications provides its services to individuals, enterprises, and other clients.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
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Dividend (Yield)	0.00

Bank of Communications (601328 CH)

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Price Gauge

52-week Range

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Dividend (Yield)

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