Add to These Positions as Market Rewards Chinese Stimulus

The “big” news on the week, at least the news that seemed to move markets the most, was China’s stimulus plans. 

It started with some monetary policy, which didn’t do much, but China followed up with fiscal stimulus, and the perception that there is more to come permeated the market thinking. We highlighted this in last Thursday’s "Buy China" piece. The theory was, and continues to be, that benefits would accrue much more to China and its companies than to the international companies.

Before delving back into China, I did want to highlight a lively discussion with Rick Santelli on CNBC live from the floor of the Chicago Board of Trade (CBOT) — which is always a treat — from Friday. We focused on “bumpy landings” and China.

The markets are continuing to reward Chinese companies — FXI and KWEB — while seeing some modest selling pressure on the major U.S. indices. The Nasdaq is underperforming.

My take for the start of the week:

Many asset managers were caught underweight or even short Chinese stocks. I suspect that much of this has been covered or will be covered by the end of the month (Monday). Month-end buying should prop up the market.

At the risk of being “too cute” I am likely going to take some profits on KWEB and FXI on Monday (targeting 10% gains on purchases from last week). Having said that, I will be adding to positions over time.

Momentum has been the trade for much of the past couple of years. With back-to-back-to-back stimulus attempts by China and a strong response from the stock market, the Chinese stocks could attract “momentum” flows.

Then there's the valuation story: Certainly many people (including myself) have lamented the valuations of some high-flying U.S. stocks. The issue has been that neither value nor small cap have captured the imagination of investors. They’ve had some decent periods of outperformance, but have not morphed into market leaders. The narrative around China could be more powerful. Some “household” names trading at “cheap” valuations. That can attract money flow.

This remains a “trade” and not an “investment.” I remain convinced that:

• Our long-term relationship with China is deteriorating and is likey to continue on that path (unless our resolve weakens, which would like turn out to be a disastrous decision down the road from a major power struggle perspective).
• China is looking to grow their brands and sell them globally — this stimulus buys them time to accomplish that. That helps their stocks more than “ours” for now.

Add to China (FXI and KWEB), but if you caught the move coming in (I had roughly half-sized positions, having taken profits earlier in the year), you can lighten up into the end-of-the-month/start-of-month enthusiasm and add back on a potential pullback. (I may get back to 50% of what I consider a very full position in my portfolio.)

A Big Week on the Economic Data Front

Lots of information coming out, and I’m continuing to lean toward the potential that the jobs data comes in “better” than expected. 

One thing that would really rattle markets (I think) would be an upward revision in non-farm payrolls. Even writing that seems weird, but since consensus is now so fully on board the “jobs data has been inflated” boat, it is getting very crowded. If I’m correct on the problems with seasonals (too many additions to start the year, too many subtractions in the summer) and if the BLS has “corrected” some of their modeling assumptions around the birth/death model, it wouldn’t surprise me to see a beat on the headline number and upward revisions. Not sure I want to bet on that, but...

Finally, the discussion is clearly headed towards the “neutral rate.”

I think we will find that the market is pricing in a terminal rate of sub-3% by the end of the July 2025 meeting and this number is “too low, too quick” (thinking more like 3.5% being the terminal rate and not getting there until the end of the year, unless we go from “bumpy” to “clunky” landing).

Bottom Line

If you want to play the China stimulus (and I do), do it direct via Chinese stocks (I use FXI and KWEB) and don’t assume U.S. “proxies” will do well.

On the rates side of the equation, I think 10s and 30s are susceptible to moves higher on steepening deficit concerns, debt ceiling negotiations and auctions — call it 4% on 10s.

In any case, let’s hope the first week of October starts better than the first weeks of August and September, but I’m starting to believe that we may see a three-peat!

At the time of publication, Tchir was long FXI and KWEB.