China Traders Seek Cover Far and Wide After Volatility Shock
As the dust settles on China’s record $720 billion stock sell-off, traders are navigating the surging volatility to figure out new strategies.
On their radar are shares of firms seen to benefit from the coronavirus outbreak -- targets include companies offering work-from-home technologies like office software maker Kingsoft Corp. or Dr. Peng Telecom & Media Group Co., which is providing its video conference services for free until March.
Industries deemed more resilient are also being favored, such as consumer staples or businesses linked to 5G wireless technology. Other assets have become popular, namely policy bank bonds, convertible bonds, exchange-traded funds and money-market tools.
The Shanghai Composite index had risen 4.4% through Thursday since Monday’s plunge, recovering about half its post-holiday decline. Buoyed by multiple support measures from the central bank and a risk-on rally globally, the small-cap ChiNext index took just two days to recoup all losses, closing Thursday at a more than three-year high. The Shanghai gauge rose 0.3% on Friday after falling as much as 1%, while the ChiNext added 0.2%. The work-from-home sector remained a bright spot.
Uncertainty caused by the country’s evolving health crisis took stock volatility to levels not seen since early 2016. The following is a selection of comments from market participants on their favored approach after the turbulent start to the Lunar Year.
Pharma, 5G and Consumers
Li Shiyu, managing director at Guangdong Xiaoyu Investment Management Co. bargain-bought pharmaceutical and technology stocks during Monday’s plunge and then sold those stocks over the next two days. He plans to continue buying dips in those sectors.
“I would like to keep my positions at half the usual level and use the rest of the money to do day-to-day trading,” he said.
Other investors are trying to find opportunities in companies that have growth potential despite the uncertainty created by the outbreak.
“Stocks have overreacted in both directions,” said Wu Xianfeng, fund manager at Shenzhen Lonteng Assets Management Ltd. “I will look for bargain hunting opportunities in sectors like consumer staples, 5G and new energy.”
Generating equity-like returns when stocks rally while providing something of a safety net when markets drop, convertible bonds are seen as a profitable hedge against uncertainty. “Convertible bonds are the best choice for bottom fishers under the current circumstances,” said Manran Ma, general manager at Beijing Mamanran Asset Management Ltd.
Monday’s panic selling did not harm investor enthusiasm toward new convertible bonds. One issued by Shanghai Putailai New Energy Technology Co. rose as much as 50% at one point during its trading debut on Tuesday.
Wang Chen, a Shanghai-based partner with XuFunds Investment Management Co., said he prefers exchange-traded funds tracking main stock indexes over trading individual stocks. He bought some of those ETFs amid the Monday selloff, before halving those positions over the following days as the market rebounded.
China saw the second-largest ETF inflows among major markets globally this week, with the China CSI 500 ETF and Huatai-Pinebridge CSI 300 ETF funds among the top picks, according to data compiled by Bloomberg.
Wang said he’d stick with index ETF trading for now before market volatility subsides. “It’s hard to forecast the market outlook in this environment.”
Chinese investors poured $1.7 billion into the city’s shares in the four days through Thursday, including Wednesday’s biggest net inflows in two years. The Hang Seng China Enterprises Index, which ended January with its worst three-day slump in almost two years, added another 2.6% Thursday. The index was 0.8% lower in late Friday trade.
China Stock Traders Most Upbeat on Hong Kong in Two Years: Chart
“I am more upbeat on the Hong Kong market rather than A shares,” said Pan Jiang, chief executive officer of private fund Shanghai V-Invest Co., who has increased his exposure to Hong Kong-listed names. “Their valuation has become very low. The reaction to the virus outbreak is more calm than in the A-share market.”
Policy Bank Bonds
Investors are snapping up policy bank bonds linked to virus-relief efforts, even though they earn less interest than notes trading in the secondary market. China Development Bank raised 10 billion yuan ($1.4 billion) of so-called virus-combat one-year debt at 1.65%, or about 40 basis points lower than the cost of similar notes. The Export-Import Bank of China also issued similar bonds at 1.61%, around 50 basis points below the market rate. The proceeds from selling such debt are planned to go toward fighting the disease.
Financial institutions are stepping up their purchase of virus-related bonds to contribute to China’s fight against the virus outbreak, said Zhou Guannan, an analyst at Huachuang Securities Co. Loose interbank liquidity also helped boost demand, according to Southwest Securities Co.
©2020 Bloomberg L.P.