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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Friday, June 17, 2022

HSI Index and S&P Midcap Index Trade

By Century Financial in Investment Insights

HSI Index and S&P Midcap Index Trade
HSI Index and S&P Midcap Index Trade

* 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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The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.

Risks & Assumptions

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Past performance is not indicative of and does not guarantee future results. Please read the complete disclaimer carefully.
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Holding cost is subject to change impacting the trade either negatively or positively.
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It is important to note that Trading pairs is not a risk-free strategy. The jeopardy comes when prices of the two securities move contrary to the positions taken resulting in losses. Thus, it is important to adhere to strict risk management rules when dealing with such adverse situations.

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.

Strategy payoff chart

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
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The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
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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.
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Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
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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.
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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.
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Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
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Unforeseen events can lead to variation in performance from the tested trading strategy.
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The tested result has been computed with price feeds available from Bloomberg.
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The testing environment has not considered transaction or any other costs.
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Trading indicators used for the purpose of testing has been provided by Bloomberg.
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The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg
Data as of: 17/06/2022

Arun Leslie John
Chief Market Analyst

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