Value Rotation, Baidu Releases ERNIE Bot Updates

Key News

Asian equities were mixed but mostly lower overnight as Korea and Japan outperformed and Hong Kong and Mainland China underperformed.

Hong Kong held up better than Mainland China as markets experienced another day of likely profit taking as up sectors from yesterday’s session were mostly lower. Meanwhile, both markets experienced a rotation into value stocks and sectors. Hong Kong’s volumes, however, remained elevated as turnover increased +30% from yesterday and Mainland investors were net sellers via Southbound Stock Connect.

The animated film Ne Zha 2 broke record at the box office in China, leading its maker the A-share (Mainland) listed Beijing Enlight Media to gain +20% overnight. The movie’s success is leading to speculation that AI-powered animation techniques were used to make the movie and these techniques could have a profound impact on the animated film industry.

Baidu, up +5%, released some upgrades to its ERNIE bot large language model (LLM), including a tool called “Deep Search”, which will add multimedia inputs and outputs. The company also announced that the model will now be available to all users free of charge. This is welcome positive news for the “Google of China” after it was passed up by Apple in favor of Alibaba to develop AI tools for iPhones sold in China.

Real estate names came under pressure after a strong rally yesterday despite news of a new housing fund to be set up in Shenzhen.

China’s State Railway Group has announced plans to create trains that are specifically designed for the elderly. The idea is to make it easier and more comfortable for the elderly to travel by train, unlocking more of their spending power. These trains would come with predefined touristic routes and comprehensive onboard services, including medical care facilities.

So far this year, Southbound Stock Connect flows into Hong Kong from Mainland investors have been heavily geared towards growth and technology stocks. Specifically, stocks in the Information Technology sector have accounted for 17% and those in the Communication Services sector have accounted for 38% of the flow, for a total of 55% of flows. We saw this trend coming with the addition of Alibaba’s Hong Kong-listed shares to the program in September of last year. As such, the rally in technology and growth stocks, driven primarily by AI optimism, has been largely driven by local (Mainland) investors, as Southbound flows have accounted for nearly one-third of Hong Kong turnover in many trading days. Foreign investors’ flows have been light and there is evidence that they, overall, still prefer US equities. The unwinding of this trade could be a catalyst moving forward.

The Hang Seng and Hang Seng Tech indexes both closed lower by -0.20% and -0.87%, respectively, on volume that increased +32% from yesterday. Mainland investors sold a net -$131 million worth of Hong Kong-listed stocks and ETFs overnight via Southbound Stock Connect. The top-performing sectors were Consumer Discretionary, which gained +0.80%, Consumer Staples, which gained +0.64%, and Utilities, which gained +0.16. Meanwhile, the worst-performing sectors were Information Technology, which fell -4.99%, Real Estate, which fell -2.43%, and Health Care, which fell -1.66%.

Shanghai, Shenzhen, and the STAR Board all closed lower by -0.42%, -0.77%, and -2.31%, respectively. The top-performing sectors were Consumer Staples, which gained +2.42%, Utilities, which gained +0.48%, and Industrials, which gained +0.33%. Meanwhile, the worst-performing sectors were Information Technology, which fell -2.37%, Consumer Discretionary, which fell -0.78%, and Real Estate, which fell -0.28%.

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