Chinese equities occupy an interesting position in the world’s equity markets. Few other developed countries have as tightly regulated of a market with as high volatility.
Despite the fact that many Chinese equities trade in value territory, the ramifications of political risk and over-regulation remain difficult for traders to price in. Government policies especially around continued back-and-forth COVID-19 lockdowns and supply chain issues make risk difficult for investors to gauge.
Couple this with systemic risk in the Chinese real estate market as a result of the Evergrande credit crisis and a recent contraction in the tech sector, and what you have is a very volatile, yet opportune environment for bullish and bearish traders alike to take a position in.
Trends in June and July
Investor inflows into Chinese equity ETFs surged strongly in June following signs that the country’s draconian “Zero-COVID” policies were abating, along with indicators that the government’s anti-trust crackdown on the technology sector was becoming more lenient. A combined total of $5.8 billion USD was recorded flowing into Chinese equities, exceeding records last set in January.
YTD (as of July 8th, 2022), the iShares MSCI China ETF (MCHI) is only down -11.54%, compared to the -18.70% loss suffered by the S&P 500 Index. MCHI suffered its deepest drawdown on March 15th, hitting a 52-week low of $43.59 due to a sell-off sparked by weaknesses in large Chinese web companies like Alibaba (BABA), Tencent Holdings (TCEHY), and JD.com (JD).
The earlier sell-off was precipitated by concerns about China’s ties to Russia given the latter’s invasion of Ukraine and the possibility of sanctions. In addition, regulatory concerns about possible de-listings of Chinese equities from U.S. exchanges prompted many traders to risk-off, which caused the major Chinese indices to plunge further.
Throughout 2022, the Chinese equity sell-off has affected its technology sector disproportionately. Sentiment towards Chinese tech and web companies soured amid Beijing’s crackdown on perceived anti-competitive practices. Beijing’s further unwillingness to cut interest rates given the state of the economy and market further dampened investor outlooks.
Foreign investors looking to trade Chinese equities face significant disadvantages from both currency risk and accessibility. For the former, surges in the USD-YUAN pair can cause significant fluctuations in value for Chinese equities if purchased and held directly. This can put traders at a significant disadvantage if FX rates move against them despite the stock moving in the predicted direction.
For the latter, investors who cannot buy Chinese equities directly must rely on American Depository Receipts (ADRs) or Contracts for Differences (CFDs). These instruments allow investors to gain exposure to foreign equities without the need for currency conversion but can suffer from low liquidity and margin requirements.
An alternative is Leverage Share’s suite of physically backed exchange-traded products (ETPs). These instruments trade in USD, EUR, and GBP on local exchanges like regular equities. Compared to other ETPs that use derivatives to gain exposure, Leverage Shares ETPs are physically backed by their underlying equities, minimizing counterparty and currency risk.
Bullish and bearish traders alike can utilize Leverage Shares’ ETPs to speculate or hedge risk when it comes to Chinese equities.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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