Stimulus Sparks 36% Surge: More to Come for Chinese Stocks?
Editor's note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.
Chinese stocks have been on fire lately in one of the most surprising investment themes so far this year. Government stimulus measures to stoke the economy are giving hopes to bulls, who have endured several false rallies since the top in early 2021.
At the start of 2024, Chinese stocks were in freefall and few traders were bullish. Yet, as frequently happens, this extreme bearishness marked an important short-term bottom.
The FTSE China 50 Index* is now up nearly 36% since late January. The Index is composed of the 50 largest and most liquid Chinese names traded on the Hong Kong Stock Exchange.
Traders looking to bet on a sustained recovery in Chinese equities may look for a position in Direxion’s Daily FTSE China Bull 3X Shares (Ticker: YINN), which seeks daily investment results, before fees and expenses, of 300% of the performance of the FTSE China 50 Index.
Below is a daily chart of YINN as of May 17, 2024.
Source: StockCharts.com
Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For the most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.
Now that the recent explosive move is garnering headlines, is the time right to fade the rally, or does this bull have legs?
Chinese Policymakers Get Serious
It’s no secret that the Chinese economy has been in the doldrums, led by a slumping real estate sector. Official data revealed that property sales in the January to April period fell over 28% from a year earlier. Home prices, meanwhile, are dropping as well, down 0.6% month over month in April—the fastest decline since 2014, according to Reuters.
Finally, though, policymakers are starting to take meaningful action to support the real estate sector. In mid-May, the government announced a slew of measures, including:
- Allowing banks to set their own mortgage rates (eliminating a government-mandated floor)
- Reducing the minimum down payment for both first and second-home buyers
- Setting aside over $40 billion for local governments to buy up unsold homes
Signs that the government is taking the real estate crisis seriously have added fuel to the bullish fire for Chinese stocks. Property developers, not surprisingly, have been especially buoyed. On May 17, an index of developers soared 10% on news of the government’s rescue plans—the highest level since November.
Chinese Internet Stocks Have Been Soaring
It’s not just property-related stocks that have been surging in China: internet names have also been catching quite the bid. Besides bullish earnings forecasts, one reason for the surge is that these companies have been aggressively buying back their own shares. Alibaba, for example, spent $4.8 billion in buybacks in the first quarter alone. In the last month, shares of the e-commerce giant have soared over 27%.
Catalysts for Traders to Keep an Eye On
Traders looking to place bets on the direction of Chinese stocks may want to keep the following potential catalysts in mind:
- More Real Estate Stimulus on the Way? Bulls have been impressed by the Chinese government’s recently announced measures to revive the housing market, but they’ll want to see even more policy action. The country has a huge backlog of unsold homes, and the stimulus unveiled so far probably won’t be enough to end the housing crash.
- Follow the Money (Yuan): Chinese stocks and the Chinese yuan have had an inverse relationship since the start of 2024. This may be because a weakening currency is good news for Chinese exporters. If the yuan keeps weakening in a gradual fashion, that’s probably good news for Chinese stocks. But if the decline becomes disorderly, that may hint at intractable problems in the domestic economy.
- How Strong is the Chinese Consumer? China is set to report retail sales data on June 17. The April report came in under consensus at 2.3% year-over-year (vs. 3.8% expected). Bulls (and especially those focused on internet stocks) want to see a much stronger print this time around. Chinese equity bears will be crossing their fingers for another miss.
Bull or Bear on Chinese Stocks, Two Ways to Take More Risk
As mentioned earlier, bulls on Chinese stocks can potentially magnify gains with YINN.
On the other hand, those traders who think the rally in Chinese stocks has gone too far can play a bearish bet using the Direxion Daily FTSE China Bear 3X Shares (Ticker: YANG). The counterpart to YINN, YANG aims to produce daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the FTSE China 50 Index.
Finally, traders who are particularly enamored with the prospects for Chinese internet stocks can express their bullishness using the Direxion Daily CSI China Internet Index Bull 2X Shares (Ticker: CWEB). CWEB seeks daily investment results, before fees and expenses, equal to 200% of the performance of the CSI Overseas China Internet 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.
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.
The CSI Overseas China Internet Index (H11137) is provided by China Securities Index Co., LTD (the “Index Provider”). The Index is designed to measure the performance of the investable universe of publicly traded China-based companies whose primary business or businesses are in the Internet and Internet-related sectors, as defined by the Index Provider, and are listed outside of mainland China, including in Hong Kong.
One cannot directly invest in an index.
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, Passive Investment and Index Performance Risk, and risks specific to Chinese securities. 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, Shorting or Inverse Risk and Daily Inverse Index Correlation Risk. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.
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