How we got our China equity market calls right
In this blog post, we discuss how our analytical process allowed us to identify the most important source of the impulse at play and help our investor clients make money.
High time for some good news from the world’s second largest economy? China’s largest stimulus package in years was announced on September 24 and followed by a raft of policy measures, injecting an adrenaline shot into the ailing stock market. In this blog post, we discuss how our analytical process allowed us to identify the most important source of the impulse at play and help our investor clients make money.
The policy blitz sparked a record-breaking rally. “This really was China’s ‘whatever-it-takes’ moment to get the equity market going,” Enodo Economics’ Diana Choyleva told Bloomberg TV on September 30. But our clients got this message on September 24 in a report called ‘Beijing unleashes greed: Chinese equities are back in the game’.
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Year of the Dragon dawns with opportunity
What we said: In January 2024, just ahead of the start of the lunar new year of the dragon, we smelled opportunity in China’s battered stock market. Our thesis was that a perfect storm was brewing, with a mooted equity stabilisation fund in the wings, pent-up domestic liquidity itching for action, and foreign investors caught with their pants down, massively underexposed.
We called it, in a report called ‘Beijing mulls unleashing greed to prop up equities’. This cocktail could create a self-fulfilling cycle of market enthusiasm. Our play? Target safe dividend-payers, especially among SOEs. Why? In a deflationary pressure cooker, these babies shine.
How we did it: Our success in identifying this opportunity stems from our comprehensive approach to understanding China’s market dynamics. We’ve cultivated a deep, contextual knowledge of China’s economy, politics, and financial markets through years of dedicated research and on-the-ground experience. Our team makes regular trips to China, engaging in face-to-face discussions with a diverse group of contacts, as well as maintains regular virtual contact with our core network.
We don’t just gather and monitor data; we analyse and interpret it through the lens of China’s unique cultural, political, and economic context. This holistic approach enables us to identify the key drivers – in this case we zeroed in on pent-up liquidity and what could unleash it – that might elude conventional analysis, giving us a distinct edge in navigating China’s complex and often opaque market environment.
Brace for an upswing – and a plot twist
What we said: In March we laid out our story on Bloomberg TV: while the economic story isn’t particularly bright, there’s a liquidity-driven market opportunity on a very short-term basis. Investors should expect a divergence in terms of what the economy does and what the market does.
Our message to investors: buckle up for a short-term, liquidity-fuelled rocket ride. The show’s anchor was surprised when we argued that an upswing of 50% was not impossible over the next two quarters, if Beijing chooses to engineer a couple of months’ sustained rally with a combination of the equity stabilisation fund, equity buybacks and increased dividends.
June brought storm clouds and a plot twist. After a two-week visit at the time of the Lujiazui forum in June, we flipped the script. At the Forum, where China’s regulators had promised to announce important capital market measures, the actual measures unveiled were decidedly underwhelming, failing to deliver the needed liquidity support.
We called it, in a report called ‘China needs to unleash greed’. Without Beijing bringing out the big guns on monetary and fiscal stimulus, this party’s winding down.
How we did it: Our success isn’t just about making the right call initially, but also about having the flexibility and decisiveness to change our stance when the situation warrants. When we saw that the promised capital market measures at the Lujiazui forum were underwhelming, we didn’t hesitate to flip our script. We’re not afraid of being wrong or changing our minds – in fact, we view this adaptability as a crucial strength.
Over time, we’ve learned that acknowledging past mistakes and avoiding the trap of cognitive dissonance is key to maintaining a nimble mindset. This approach allows us to react swiftly and appropriately when market conditions shift. In this case, we decisively called an end to our tactical bullish stance when we saw that Beijing wasn’t bringing out the big guns.
Our ability to pivot quickly and communicate this change clearly to our clients is a testament to our commitment to providing timely, accurate market insights, even when it means reversing our previous position.
The “Whatever-It-Takes” Moment
What we said: Happy birthday! A week ahead of the PRC’s 75th anniversary, regulators and the People’s Bank of China (PBOC) gifted the nation a surprise package of stimulus measures on September 24. Beijing hopes to jump-start moribund growth by targeting China’s stock market and property challenges.
The PBOC introduced $114bn worth of new funding tools for buying stocks and pledged more monetary easing, while Governor Pan Gongsheng said the establishment of a stabilisation fund for stocks was being considered. The reserve-requirement ratio (RRR) for banks would be reduced by a half point, freeing up 1 trillion yuan to go out as loans, and promised more to come.
We were the first to call it: this is China’s “whatever-it-takes” moment. While others scratched their heads, we spelled it out for our clients on Tuesday 24th, in a report called ‘Beijing unleashes greed: Chinese equities are back in the game’. This wasn’t just policy tinkering; this was a seismic shift in Beijing’s narrative.
How we did it: In fast-moving situations like the surprise stimulus package, our process truly distinguishes us from the pack. Our multi-dimensional toolkit, honed over years of experience, allows us to swiftly identify the most crucial impulses at play in China’s complex policy landscape. We understand that the drivers of change in China can emanate from various sources – be it economic imperatives, political considerations, or social dynamics.
Our approach doesn’t just analyse these factors in isolation; it synthesizes them to pinpoint the primary catalyst. This is why we were the first to recognize Beijing’s announcement as China’s “whatever-it-takes” moment, while others were still grappling with its implications. Our process gives us the confidence to raise our heads above the parapet and make bold, timely calls.
We’re not afraid to be the first to interpret major shifts because our methodology has been tested and refined over time, proving its effectiveness in deciphering the intricate web of Chinese policymaking. This ability to quickly discern the direction of causation and articulate its significance to our clients is what sets us apart, especially when the environment is unfolding rapidly.
What’s Next
No one should rest on their laurels, so we continue to watch these key factors among everything else:
- PBOC’s next move and monetary developments
- Domestic financial institutions take-up of liquidity
- Fiscal stimulus and local government response
- Property market reaction
- Chinese consumer behaviour
- Foreign investment flows
As the Chinese equity market story evolves to discover what we are saying next, reach out to our team today.
Unlock Critical Insights: Gain exclusive access to Enodo’s game-changing analysis and understand how this issue will reshape your world. Click below for TRIAL ACCESS to our premium research.
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