Investors Contemplate China’s Potential Stimulus

Investing.com — The recent stimulus announcements from China have raised investor inquiries regarding positioning for a possible aggressive economic boost—a ‘bazooka’ stimulus.

In a Tuesday note, Barclays analysts acknowledged this is not their base case but stressed investors should prepare for such an event due to its potential global market impact.

Despite a recent rally in Chinese equities, the overall market reaction has been somewhat muted, leaving space for opportunities in other asset classes.

Chinese equities have demonstrated some of their largest historical movements, with the CSI 300 recording an astonishing 1-week sigma move of +17.6. Barclays analysts observed, “The magnitude of these moves suggests that investors were unprepared for such announcements, and that technical factors, such as positioning, may have acted as a tailwind.”

They added, “While further upside may exist, the bulk of the near-term movement may be over.”

This rally has been mainly limited to Chinese equities and their proxies, like European miners. However, Barclays anticipates that a substantial fiscal stimulus, such as a CNY10 trillion package over two years, could have greater implications for global markets, creating opportunities outside China.

In a ‘bazooka’ stimulus scenario, the anticipated effects would likely reach global assets, enhancing upside opportunities in non-Chinese assets due to less extreme moves and lower volatility.

Barclays outlined several strategies to benefit from this potential, concentrating on oil, industrials, and U.S. stocks with substantial exposure to China.

Among their suggestions, analysts proposed purchasing calls on the U.S. Oil Fund (USO) contingent upon a stronger euro against the dollar, as oil is particularly reactive to positive surprises in Chinese demand.

A further opportunity is in industrials, with Barclays recommending the purchase of hybrid XLI (Industrials) vs. SPY (S&P 500) call spreads, given that the Chinese credit cycle has historically served as a strong indicator for industrials’ performance.

Lastly, for direct exposure to U.S.-China trade, Barclays identified companies with significant Chinese sales exposure and appealing volatility profiles as prime candidates. These include Wynn Resorts (NASDAQ:WYNN), Western Digital (NASDAQ:WDC), and Las Vegas Sands (NYSE:LVS), which may experience considerable gains should China’s economy recover due to stimulus.