Friday, June 17, 2022
HSI Index and S&P Midcap Index Trade
By Century Financial in 'Investment Insights'
* Trading in financial market carries risk and can result in loss of capital.
* This performance is only observed with historical backtests and not traded by the company.
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Risks & Assumptions
Turnaround in Chinese equities
Chinese equities are turning their potential to outperform into reality. This outperformance can continue as policy divergence will likely become more palpable, especially against the US where decades-high inflation has spurred bets for outsized Fed rate hikes. The recent rebound in the Chinese stocks is also accompanied by a pickup in trading volume, a signal that investors are getting more confident about a turnaround.
Monetary Policy Contrast
The Fed lifted its benchmark interest rate by 75 basis points, the largest one-time increase in almost three decades, and warned of further sharp hikes for the rest of the year to combat soaring inflation. The People's Bank of China, in contrast, kept a key lending rate unchanged for a fifth straight month. The Chinese central bank also maintained the rate of the seven-day reverse repurchase agreement.
While China is not totally immune from the fallout of the Fed's aggressive rate hike, the world's second-largest economy will be able to keep its accommodative policies thanks to its mild inflation level and the relative stability of its currency.
The stark difference between the monetary policies of the two countries has led to a deviation in the performance of the Hang Seng Index, against the SPX Mid Cap Index.
Long: HSI Index & Short: S&P Midcap Index
The chart below portrays a trendline breakout on the ratio between HSI and Mid Cap index. The ratio is likely to move higher.
Data Source : Bloomberg
Data & Prices as of : 17/06/2022
Booster for HSI: Acceptance of Ant Group Application
The planned IPO of Ant Group, which is controlled by billionaire Alibaba founder Jack Ma, was pulled in November 2020 after regulators flagged concerns with the company. The cancellation of Ant’s IPO kicked o a series of regulatory actions that changed the playbook for the nation’s tech champions then.
As of 17th June 2022, China's central bank has accepted Ant Group's application to set up a financial holding company. The license approval also reinforces sentiments that China’s regulatory crackdown is easing. Ant's IPO is expected to restart, which will have a positive impact on the Hong Kong IPO market. And the restart of Ant’s IPO indicates that relevant regulations may be relaxed, which will benefit the recovery of the market in HK and increase investors' confidence in investments as well.
The HSI Index is priced at HKD 21,075, whereas the Mid Cap Index is priced at $2,200 as of June 17th, 2022. The table below elaborates on the dollar neutral investments to be made on both legs of the trade. An exchange rate of 7.85 has been assumed for USD/HKD.
CMP (LCL Currency) | CMP ($) | Position Size ($) | Units | |
HSI | 21,075 | 2,685 | 50,000 | 18.62 |
Mid Cap | 2,200 | 2,200 | 50,000 | 22.73 |
Total | 100,000 |
Source: CMC Markets
Date: 17th June 2022
Risks and Assumptions for Back-tested trading strategies
Data Source: Bloomberg
Data as of: 17/06/2022
Arun Leslie John
Chief Market Analyst
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