Chinese 'Bazooka' Could Drive Significant Alpha

China announced some monetary stimulus earlier in the week. While important, and somewhat helpful for Chinese stocks and bonds, it didn’t reverberate across the globe.

Now, China is embarking on fiscal stimulus, and signaling that there might be more to come — specifically to help the banks, which in turn should fuel the economy.

We had been very bullish on Chinese stocks earlier this year (FXI and KWEB as ETFs) but backed off after they ran into resistance and the Chinese economy continued to struggle.

Now, it is time to go back in. Again, nothing has changed about the view that China is not investible, but it is certainly tradable.

This fits my "Threat of Made by China 2025" narrative, both from a long-term perspective and from a current trading standpoint. The premise of the theory is quite simple:

• The Chinese economy is struggling, especially while real estate, the source of wealth for many, is in disarray
• China can no longer rely on foreign companies manufacturing goods in China (that ship has sailed as the risk of losing IP is real, the ability to sell into China rarely materializes in the way companies hoped and the COVID lockdowns taught many companies, the hard way, how little control they had in China)
• As such, China must make and sell their own brands globally

There has been some success in doing this. Certainly in the domestic market, their own phone brands are thriving. I’ve seen reports that BYD is the number-one selling EV in Germany. Finally, let’s be completely honest, how many people had heard of Shein or TEMU at this time last year? And now, even in the U.S., they seem to be gaining traction.

But, despite that progress in selling their own brands domestically, but more importantly, globally, the overall economy is still struggling.

So, the solution, which fits well, is to boost the domestic economy.

Let the domestic economy (supported by the government) buy the time needed to continue to try and sell products internationally. It makes sense.

So, we have stimulus at home, which should give China breathing room and let many of their companies boost domestic sales, while trying to expand globally.

Added to that the fact that we have most investors as underweight China as possible – so the potential for a “catch up” trade is extreme! While small-caps and domestic value stocks have had some nibbles, based on the Fed cutting, etc., that should pale in comparison to investors being forced to chase Chinese stocks (FXI and KWEB are my preferred methods, out of simplicity, more than anything else).

The Middle East

We may have seen “escalation to de-escalate” last week! We discussed this as part of a full 10-minute interview on Bloomberg TV last week (which starts at the five-minute mark).

Again, the theory is quite simple:

• Hezbollah (and likely other enemies of Israel) are living in fear, wondering what else has been compromised (they can clearly add pagers and walkie talkies to cell phones and even “in-person” meetings to that list). There has to be real fear there and an inability to organize any response.
• If you believe that Iran’s 1,000 missile, drone and rocket attack on Israel was meant to succeed (and I do, as many of our geopolitical intelligence group members have argued that you don’t send that many weapons, coordinated with staggered launches to arrive at the same time, expecting an almost 100% failure rate). So, if Iran already took their best (or close to best) shot at retaliating, it would explain why they haven’t launched a full-scale attack on Israel as retaliation for other Israeli reactions. One major attack that failed can be gaslit as “we telegraphed” it, but a second attack that fails would expose critical weakness.

There are plenty of reasons to be optimistic that “escalate to de-escalate” could work here.

The other message, being somewhat signaled by the Saudis on Thuesday (by increasing production), is that the region, as a whole, did not completely back away from Israel (not to mention the progress on the Abraham accords). Yes, relations cooled, but there was not a complete about-face.

The region, especially the Saudis, are trying to develop economies that can do well after the age of fossil fuels (the Saudis are attempting to become “the data center capital of the world” is just one of their interesting initiatives).

While the problems in the Middle East haven’t impacted markets dramatically, a cessation of the current level of hostilities would be welcomed by the markets (and the people in the region and across the globe).

Bottom Line

So, while positive for the “global” economy, I’d move my chips into China rather than trying to benefit from this stimulus in less direct ways. It is still “just a trade” rather than an investment, but it could drive significant alpha, like it did early this year.

At the time of publication, Tchir had no positions in any securities mentioned.