China Stocks Look Set For A Rebound, Morgan Stanley Quant Strategists Say

Investors in mainland China are rapidly unwinding their stock-index hedges, in an indication that a possible end to Chengdu’s lockdown and policies to stabilize the yuan will lead to a near-term market rally, reported Bloomberg, citing a note written by Morgan Stanley quantitative strategists.

What Is Hedging: Hedging is insurance that traders use to prevent huge losses due to unexpected market movements. For example, investors or traders who have bought stocks in huge quantities, usually tend to go short on index futures or buy ‘put’ options to neutralize or reduce the hit during a drastic market fall.

The Pattern: The strategists, including Gilbert Wong and Ronald Ho, wrote that based on historical trading patterns, the unwinding of hedges during a market decline usually implies a tactical risk rally.

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The quant strategists mentioned three factors to back their thesis.

The demand to hedge via CSI 300 and CSI 500 index futures is at the lowest since October 2021, they said. Call options are far more popular than bearish puts — a historical anomaly — and implied volatility is also low. Friday’s net inflows were the strongest on a year-to-date basis at $2.1 billion, it stated.

Benzinga’s Take: The CSI 300 index has gained over 2% in the last five days and was last trading at 4,111. The index rebounded from crucial support at 3,982 on Sept. 5 and is gradually headed towards a near-term resistance of 4,223. If this level is breached, the index is likely to rally towards its July highs of 4,528.

Price Action: The Invesco Golden Dragon China ETF PGJ closed 2.61% higher, while the KraneShares MSCI All China Health Care Index ETF KURE closed 1.4% up on Monday.
The Invesco Golden Dragon China ETF is down 16.8% year-to-date and KraneShares MSCI All China Health Care Index ETF is down 28.6%.