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Thursday, September 11, 2025

Small Caps Catch Up? A Long RTY & Short SPX Play

تم إعداد هذا المنشور من قبل سنشري للاستشارات

Small Caps Catch Up? A Long RTY & Short...
China's Investment case - Stimulus, AI and Value

Aggressive stimulus and fiscal support - At the start of 2025, Beijing announced the issuance of 3 trillion yuan in government bonds to boost business investment and household consumption. This policy support helped China’s economy expand by 5.3% in the first half of 2025, even amid rising external pressures. However, in July and August, the economy slowed down, which raised expectations for Beijing to roll out more stimulus this year to offset the impact of Donald Trump’s trade war.

Signs of fiscal activity are already visible as China’s 10-year bond yields have steadied since January, reflecting heavier bond issuance and sustained government financing efforts.

China 10 year bond yield

PBOC financing support and liquidity boost – Following the release of soft economic data in July, the People’s Bank of China pledged to step up financial support for priority sectors, including technology and consumption. This marks a shift away from its traditional focus on channeling credit to property and infrastructure, signaling a more targeted, innovation-driven approach to sustaining growth and stabilizing demand

Leadership in AI and Advanced Technology - China’s strategic ambitions in AI have accelerated in the wake of DeepSeek’s breakthrough launch, with momentum expected to build over the next 24 months. Despite ongoing semiconductor supply constraints, China is steadily narrowing its gap with the U.S., leveraging its strengths in software development and applied AI to emerge as a leading challenger in the field worldwide. According to the Financial Times, Chinese chipmakers plan to triple AI chip output by 2026, thereby reducing their reliance on Nvidia and strengthening domestic supply chains.

Investor sentiment is aligning with this trend: in the week ending August 31, China-focused AI, tech, and fintech ETFs led global inflows and returns, supported by government stabilization measures and expectations of surging demand for locally produced chips that power the AI and EV industries.

A key enabler of this growth is China’s dominance in electricity. Unlike the U.S., where an aging grid is constraining AI infrastructure, China benefits from a robust and expanding power network. As highlighted by Ember, China has nearly doubled its share of primary energy since 2000 to almost 25%, while the U.S. has remained stagnant—underscoring a structural edge in scaling AI capacity.

Domestic consumption revival – In H1 2025, consumption-related fiscal spending outpaced overall expenditure growth, with targeted subsidies for smartphones and home appliances expected to lift retail sales through the second half of the year. On August 12, authorities introduced a new consumer loan program, effective September 1, that offers subsidized borrowing through August 2026 for automobiles, electronics, and essential services, including elderly care, child care, education, and tourism. This initiative builds on earlier stimulus efforts and is designed to support large-ticket purchases while broadening demand in the service sector. Looking ahead, the PBOC is expected to ease monetary policy further, following weak July activity and credit data, which will provide additional tailwinds for household spending.

Attractive Valuations – With concerns over stretched valuations in U.S. tech, investors are increasingly rotating into Chinese tech stocks. Alibaba’s recent earnings beat highlighted this trend, with stronger cloud sales and a revival in e-commerce drawing renewed attention from global funds. A softer U.S. dollar is further reducing the appeal of dollar-denominated assets, encouraging diversification into Asia. Valuation gaps remain compelling: while the S&P 500 and Nasdaq trade at forward P/Es above 20, the Hang Seng and Hang Seng Tech Index continue to sit well below that threshold, offering investors both growth exposure and relative value.

Technicals

Hang Seng Index (HK50)

Source: Trading View
Timeframe: Weekly
Date: 2nd September 2025

  • The Hang Seng Index trades at HKD 25,343 and has already broken out of the 2022 resistance at HKD 24,210.
  • It is currently trading in an ascending parallel channel on the weekly timeframe.
  • The index trades below the HKD 30,000 touched in 2021, and faces a near-term resistance and support at HKD 27,000 and HKD 24,210, respectively.

The following two ETFs listed in US give specific exposure to China Technology and AI-related stocks.

KraneShares CSI China Internet ETF (KWEB)

Source: Trading View
Timeframe: Weekly
Date: 2nd September 2025

  • The ETF is testing the 2022 resistance and has formed a three-year base.
  • A breakout from this level can push it towards the next resistance at $54
  • The pattern gets invalidated below $30, which coincides with the ascending trendline support.

Invesco China Technology ETF (CQQQ)

Source: Trading View
Timeframe: Weekly
Date: 2nd September 2025

  • The ETF has broken out of the 2022 resistance at $51.44 and is restesting the same level. It can potentially test the next resistance at $74.29.
  • The high volumes in the recent months reflect the optimism around stimulus and smart money building positions.
  • On the contrary, the chart gets invalidated below $36.
Risks and Assumptions related to Back-tested trading strategies
The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
The back-tested strategy might be at risk of data dredging, which is the behavior of testing multiple hypotheses at one time, resulting in picking the data that best supports your main hypothesis.
Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
Unforeseen events can lead to variation in performance from the tested trading strategy.
The tested result has been computed with price feeds available from Bloomberg.
The testing environment has not considered transaction or any other costs.
Trading indicators used for the purpose of testing has been provided by Bloomberg.
The strategy might suffer from data mining fallacy, selection bias and backfill bias.
A trading strategy that performs well on multiple datasets from one market (e.g., forex) might not perform as well in another market (e.g., stocks).
The strategy may not depict accuracy in terms of spread changes due to the spread-widening events.

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