How To Navigate China's Post-COVID Market Rally

China is the world’s second-largest economy after the United States, making the market a potential opportunity for traders looking to diversify their trades—especially now as the S&P 500® Index struggles to break out of the bear market territory. While the U.S. market is bearish, China has been enjoying a healthy rally, with Hong Kong’s Hang Seng Index* soaring 50% in the three-month period ending January 31. Here are some potential tips for traders looking to capture yield from China’s post-COVID recovery.

China’s Policies Supporting Market Growth Could Help Maintain Bullish Momentum

After three years of lockdowns meant to curb COVID cases, China officially dropped all COVID-related restrictions and reopened the economy. The reopening triggered an immediate rally across Chinese stocks last year that continued almost unabated until the end of January when it began to level off.

But China’s economy has yet to recover its full pandemic era losses, which has some analysts optimistic that the rally still has plenty of room to grow. 

The nation’s retail and travel sectors are anticipated to see the strongest growth this year as Chinese consumers look to spend a significant amount of savings accumulated over three years of repeated lockdowns. 

Keep a Close Watch on U.S.-China Relations

While China’s economy has a strong positive outlook, momentum could be stymied if the simmering tensions between China and the U.S. boil into trade sanctions. The recent spy balloon debacle may have been the most public display of escalating tensions, but the two nations have been battling over multiple geopolitical issues lately, which has traders cautious.

That includes concerns that China may choose to provide material support to Russia in the Ukraine invasion—though Beijing has said it’s committed to peace talks. Another source of tension is the issue of Taiwan’s independence and the U.S. military presence there.

In February, U.S. officials said they were planning to quadruple the number of U.S. troops stationed in Taiwan, where they would help train the Taiwanese military. The expanded military presence is an effort to fend off a possible Chinese attack on the island nation, which China views as a breakaway province that should be brought under Beijing’s control. 

While the countries continue to butt heads, neither has moved toward sanctions just yet but if they do, the impact on the stock market could be substantial, so traders may want to be ready to switch to a bearish strategy if that happens.

Seek Exposure to Chinese Stocks and Potentially Magnify Results by Trading Leveraged ETFs

Many traders opt for ETFs rather than directly trading stocks on the Hong Kong Stock Exchange because it’s a way to gain exposure to Chinese securities that traders otherwise might not be able to trade outright due to foreign investment restrictions.

The Direxion’s Daily FTSE China Bull (YINN) and Bear (YANG) 3X Shares, seek daily returns that are 300% or -300%, respectively, of the return of the FTSE China 50 Index*, giving traders a chance to not only gain exposure to the market but potentially magnify the performance of each trade they make. 

The FTSE China 50 Index is made up of the 50 largest Chinese companies with the most liquidity currently trading on the Hong Kong Stock Exchange. As of 12/31/ 2022, that includes the following top 10 holdings:

Holdings are subject to risk and change. 

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.

Featured Photo by Cheung Yin on Unsplash

The Hang Seng Index or HSI is a free-float market capitalization-weighted index of the sixty largest companies that trade on the Hong Kong Exchange.

The FTSE China 50 Index (TXIN0UNU) consists of the 50 largest and most liquid public Chinese companies currently trading on the Hong Kong Stock Exchange as determined by FTSE/Russell. Constituents in the Index are weighted based on total market value, so that companies with larger total market values will generally have a greater weight in the Index. Index constituents are screened for liquidity and weightings and are capped to limit the concentration of any one stock in the Index. One cannot directly invest in an index.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing. 

Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.

Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time.  Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Tax Risk, and risks specific to Chinese securities, including Chinese Government Risk, Chinese Markets Risk, Chinese Currency Risk, and Hong Kong Securities Risk.  The Chinese economy is generally considered an emerging market and can be significantly affected by economic and political conditions and policy in China and surrounding Asian countries. Securities from issuers in emerging markets face the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market shutdown and more government limitations on foreign investments than typically found in more developed markets.  Additional risks include, for the Direxion Daily FTSE China Bull 3X Shares, Daily Index Correlation Risk and for the Direxion Daily FTSE China Bear 3X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting.  Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

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