Hedge Against Flare-Up in China Tensions With U.S., SocGen Says
Investors should seek portfolio hedges for Chinese equity positions as trade tensions with the U.S. mount, according to strategists at Societe Generale SA.
Stocks are yet to respond to a deterioration in U.S.-China relations since the coronavirus outbreak, particularly to developments over the summer, strategists including head of Asia equity strategy Frank Benzimra wrote in a note dated Aug. 24.
“Onshore equity markets have barely reacted,” they said. “The sanguine reaction of the market contrasts with the initial period of the trade war when tariff hikes weakened the market.”
SocGen recommends a strategically overweight position in Chinese stocks, but advises investors to seek hedges against a potential escalation in tensions including:
- A short position in a basket of stocks listed in Hong Kong, Taiwan and South Korea that produce or transport goods to the U.S. to protect against an end to the Phase 1 trade deal.
- Shorting tech names such as Alibaba Group Holding, Baidu Inc and Tencent Holdings if the U.S. extends restrictions on WeChat to other software and telecom firms.
- Hedging Hong Kong and Chinese banks in the event of additional sanctions on financial institutions linked to individuals tied to the city’s crackdown on pro-democracy protests.
- Shorting offshore stocks named by the U.S. Defense Department as having links to the Chinese military in case pressure from Washington leads index compilers to exclude or limit weightings of these stocks.
©2020 Bloomberg L.P.