Strategist Who Called China Rally Sees More Room for Gains

(Bloomberg) — A Bank of America Corp. options strategist who appropriately anticipated gains previously is now saying the rally that’s made Chinese equities a few of the world’s best this 12 months can have more room to go. And plenty of are positioning for it.

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Demand for bullish bets has increased because the nation announced a slew of initiatives to revive its economy, in accordance with Lars Naeckter, the bank’s head of Asia Pacific equity derivatives research. The price of call options versus puts is near its highest level since a minimum of 2008 for Chinese stocks listed in Hong Kong in addition to for a US exchange-traded fund tracking the shares.

While the Hang Seng China Enterprises Index has given up almost half of its recent gains, Naeckter says the market could still rally further given the nation’s policy pivot and investors’ appetite to re-enter the trade. In early September, because the equity gauge traded near a low, he advisable a bullish options structure that returned greater than 360%. The Hang Seng China Enterprises Index rose as much as 2.9% on Friday.

“The opportunities are still there,” Naeckter said in an interview in Hong Kong this week. “There’s significant upside potential for this market from here, as we balance the uncertainty with the continued stimulus measures when it comes to scope and timing.”

Like Bank of America, other firms are seeing more gains ahead. Over at Goldman Sachs Group Inc., the trading desk advisable last week Hang Seng Enterprises call spreads and collars — buying puts while selling calls — to benefit from the elevated implied volatility.

Bank of America advised earlier this month to roll the September Hang Seng Enterprises trade into November/December calendar call spread collars that may even cover the upcoming US presidential election — the firm expects volatility to stay elevated until the vote and fall after. Moreover, Naeckter’s team suggested bullish options strategies on the US-listed iShares China Large-Cap ETF.

“There’s going to be continued noise between the US and China and the continued uncertainty around that,” Naeckter said within the interview on Monday. “Nonetheless, for market participants, the larger elephant within the room is Chinese policy and the meetings which might be coming up.”

Investors are waiting for the gathering of China’s top legislative body, the National People’s Congress Standing Committee, in the approaching weeks as it can must approve any extra fiscal budget or bond quota.

The Chinese equity market has been on a roller-coaster ride since late September, when a series of stimulus measures unleashed a burst of optimism that’s now cooling. As Beijing takes its time in detailing a fiscal spending plan, skepticism is growing about whether authorities are willing to deploy greater firepower to show across the economy and markets.

Also read: Chinese Stocks Slide Into Correction as Stimulus Hopes Wane

At a derivatives trading forum in Hong Kong on Monday, Peter Yip, head of currencies and emerging markets at JPMorgan Chase Bank, said demand for China hedges has also increased given the outlook for interest-rate cuts globally.

Plus, investors need to avoid a repeat of the boom-and-bust episode from 2015, when Chinese stocks spiraled uncontrolled, reaching a seven-year high whilst economic growth disillusioned — a situation that’s unsustainable in the long term, Naeckter said.

“There stays a healthy dose of skepticism, which is nice within the sense that we may not get an overshoot on the upside,” he said.

–With assistance from Sangmi Cha and Henry Ren.

(Updates market prices. An earlier version of this story corrected comments by a panelist at a forum in paragraph 10)