Wall Street Remains Bullish On China

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

The November rally in U.S. equities may be garnering most of the attention (especially as we get closer to having a COVID-19 vaccine) but don’t sleep on China.

Among Direxion’s stable of leveraged ETFs, two of the five top-performing funds year to date provide magnified exposure to China. Here’s a breakdown of what has driven each fund higher.

Daily CSI 300 China A Share Bull 2X Shares

The Direxion Daily CSI 300 China A Share Bull 2X Shares CHAU finds itself higher by about 17% over the past month. The ETF, which aims to deliver 200% the daily performance of the CSI 300 Index, has been propelled to its current levels thanks to strength across a surprising array of consumer-driven sectors including financials as well as consumer staples and discretionary stocks.

Standouts within the ETF include China Merchants Bank CIHKY, higher by about 25% in November, and appliance manufacturers Gree Electric and Midea Group, which both rose about 15% during the month.

Bolstering these and other Chinese A-share equities in the index are strong consumer spending numbers. However, those spending numbers aren’t from Chinese consumers. Instead, these A-shares are being supported through strong export numbers to consumer economies outside of China, in neighboring countries like Singapore, Malaysia, and even the U.S. and Europe.

China’s own consumers are not so eager to spend, especially as an estimated 9% of its workforce remains unemployed. As a result, much of the country’s economic traction is coming from the country’s booming export figures, which may diminish if and when the world bounces back from the pandemic.

Nevertheless, the numbers have been an encouraging driver for Chinese stocks at large. And even though exports are the primary economic driver, they’re not the only one.

In a dynamic that U.S. investors are very familiar with, companies with large online presences have dominated and become increasingly central to China’s economy, as evidenced by the strength in Direxion’s Daily CSI China Internet Index Bull 2X Shares CWEB. Though the trade has cooled off of late, CWEB has still more than doubled in 2020.

That return is the product of fairly consistent growth across most of the country’s many internet giants. This of course includes e-commerce powerhouses Alibaba Group Holding Limited BABA JD.com, Inc. JD and Meituan-Dianping MPNGF, the latter of which has seen massive growth thanks to its online food delivery.

However, the biggest standout among this internet contingent is the recently IPO’ed fintech KE Holdings, Inc. BEKE, which has surged 72% since its listing in early August. Backed in part by Japan’s SoftBank Group Corp SFTBY, the online property platform has drawn comparisons to Zillow Group Inc ZG and has ridden on rising enthusiasm in China’s economic resilience and sustained growth in boosting the nation’s real estate market.

In addition to CHAU and CWEB, Daily FTSE China Bull 3X Shares YINN (up 15% in the last month) and Direxion Daily Emerging Markets Bull 3X Shares EDC (up 29%) have also outperformed.

Ultimately, what continues to drive China’s growth is its dedication to building itself by investing in public services and utilities like high-speed internet and essential infrastructure to bolster both its manufacturing and technological capabilities. These investments, combined with the allure of its rising middle class, appear likely to keep Wall Street bullish on China in spite of any geopolitical headwinds.

 

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Direxion Shares Risks – There are special risk considerations relating to Stock Connect Program and RQFII and QFII investors and the Chinese A-Share market. The Stock Connect Program is subject to daily and aggregate quota limitations, and an investor cannot purchase and sell the same security on the same trading day, which may restrict the other funds’ or counterparties’ ability to invest in A-Shares through the Stock Connect Program and to enter into or exit trades on a timely basis. A-shares are issued by companies incorporated in the People’s Republic of China (“PRC”). The A-share market in China is made available to domestic PRC investors and certain foreign investors, including those foreign investors that have been approved as Renminbi Qualified Foreign Institutional Investors (“RQFII”) or as Qualified Foreign Institutional Investors (“QFII”). The Fund’s ability to achieve its inverse investment objective is dependent on the ability of other ETFs and counterparties to obtain their QFII or RQFII quota. If the Fund is unable to obtain sufficient exposure to the Index due to the limited availability of necessary investments or financial instruments, the Fund could, among other things, as a defensive measure, limit or suspend creation units until the adviser determines that the requisite exposure to the Index is obtainable. During the period that creation units are suspended, the fund could trade at a significant premium or discount to its NAV and could experience substantial redemptions.

Risks associated with investments in Chinese companies include, among others, (i) the small size of the market for Chinese securities and low trading volume, resulting in a lack of liquidity and in price volatility; (ii) currency devaluations and other currency exchange rate fluctuations or blockages; (iii) the nature and extent of intervention by the PRC government in the Chinese securities markets, whether such intervention will continue and the impact of such intervention or its discontinuation; (iv) the risk of nationalization or expropriation of assets; (v) the risk that the PRC government may decide not to continue to support economic reform programs; (vi) limitation on the use of brokers; (vii) higher rates of inflation; (viii) greater political, economic and social uncertainty; (ix) market volatility caused by potential regional or territorial conflicts or natural disasters and; (x) the risk of increased trade tariffs, embargoes and other trade limitations. These factors can directly affect A-shares, and may indirectly affect investments that derive their value from A-shares. Any reduction or elimination of access to A-shares will have a material adverse effect on the ability of the fund to achieve its investments objective.

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The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.

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