China will soon be entering the Year of the Wood Dragon, which is believed to promote growth, progress, and abundance. For investors in Chinese stocks, this will be a very welcome break from the past few years.
The Chinese government does not want stock market losses to make headlines as families and friends gather for the holidays starting February 9, Evercore ISI strategist Neo Wang wrote in a recent note. There is. To this end, the People’s Bank of China announced a larger-than-expected cut in bank reserve requirements on January 24, and Governor Wang predicted further cuts at the next policy meeting on March 5. ing. The mood turned bearish over the holidays, according to a note from Julien Emanuel, chief equity and derivatives strategist at Evercore.
However, despite reports that the authorities are considering measures to boost the stock market totaling approximately 2 trillion yuan (approximately $280 billion), sentiment remains sluggish. It’s not just among investors in China; that negative opinion is shared around the world. Shorting Chinese stocks was the second most crowded trade after the Magnificent Seven’s holdings in U.S. mega-tech stocks, according to a new Bank of America survey of global fund managers. .
is the benchmark for China
CSI300,
In 2023, there will be an unprecedented third consecutive year of decline, with Hong Kong’s
Hang Seng Index
This is the fourth consecutive year of decline and comparable growth.
Dow Jones Industrial Average
It plummeted from 1929 to 1932, writes Jawad Mian, founder of Stray Reflections, a macro advisory firm that works with hedge funds and portfolio managers around the world. But he points out that the Dow soared 66% in 1933 after the Federal Reserve injected liquidity through bond purchases (what we now call quantitative easing) and the New Deal began.
Jason Hsu, founder and chief investment officer at Rayliant Global Advisors, said he feels like the Chinese market has bottomed out and been building for some time. Investors are waiting for more than a phased stimulus package in 2023. “That $280 billion is real money just for the stock market,” he said of the expected support package. He believes this is the first of many things to come, both in creating jobs and rebuilding a battered real estate sector.
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In fact, Vivian Lynn Thurston, emerging markets portfolio manager at William Blair Investment Management, says the market has been waiting for this kind of action since the first quarter of last year. Monetary policy has been supportive, but liquidity has not penetrated the stock market. And unlike in the West, there was no spike in “revenge spending” after the coronavirus-induced government shutdown finally ended.
Chinese authorities have the advantage of two data points to guide policy, Su observes. They say that how Japan dealt with the real estate bubble and its bursting caused so much inaction for so long that the Nikkei stock average remained below its 1989 high during the three-year “lost” period. 10 years” can be found out. In contrast, he points out, the United States responded to the 2007-2008 mortgage crisis with qualitatively larger and more immediate policies, then quickly pulled back and let the market function.
Su looks ahead to China Evergrande Group’s high-profile decline and eventual liquidation
,
It is a symbol of China’s real estate crisis and an example of Beijing planning for a relatively mild earthquake rather than an all-destroying 9.0. The authorities were wise to accept considerable short-term pain. He thinks they could have avoided a long-term Japanese-style disaster.
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Thurston believes China’s problems remain structural and cyclical. Stock markets can benefit from technical support, but fundamental issues, particularly those of local governments that rely on land sales for financing, will require further support. . That said, she says it’s puzzling that something big like the rumored $280 billion aid package hasn’t come out of Beijing yet.
The stock market seems like an easier problem to solve. Given the deflation in China’s real economy, injecting liquidity is an easy step, Su said. Technical market settings are also favorable, Mian writes, with the CSI 300 positioned at his eight-year trend line.
Essentially, Thurston says he is underweight Chinese stocks in his broader emerging markets portfolio. He noted that market risk premiums remain elevated due to continued tensions between the US and China, and will remain so regardless of the outcome of the US election.
That won’t preclude a rally, especially if a significant market support move emerges, as is widely expected after the New Year’s celebrations. In fact, Evercore’s Emanuel writes that given record short-term interest rates, there could be a “bear trap” setting in place that could prompt a big move to the upside.
iShares China Large Cap
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The exchange-traded fund (ETF) that represents the CSI 300 is better known by its ticker FXI.
Given the upside potential associated with a broad decline, he recommends purchasing FXI call options, specifically the $23.50 strike price that expires on March 28th. The ETF’s closing price on Thursday was $21.86, with options expiring at 49 cents. The ETF must trade above $23.99 for the trade to be profitable.
If the year of the Wood Dragon lives up to its reputation, its trade may bring happiness and prosperity. Whether Beijing’s efforts will result in a true long-term bull market is another question.
Write destination Randall W. Forsyth, randall.forsyth@barrons.com