Are the bulls back in the China shop?
02/10/17

Asian stocks have lagged for years, but now the bulls seem to be back in the China shop.

News reports have cited cheap valuations for the country’s equities, while economic reports have recently beaten estimates. There are also hopes that new monetary policies will reverse the yuan’s 18-month slide.

Traders expressed an optimistic outlook for the country on Thursday in the form of purchasing over 30,000 March 39 calls in iShares China Large-Cap Fund (FXI) for $0.33 to $0.35. Calls are options to buy a security.

For instance, FXI only needs to appreciate 6 percent to reach $40, but the calls would triple to $1 in the process. (They’ll become worthless if the strike price isn’t reached by expiration.) FXI rose to a three-month high of $37.81 at market close yesterday. (Breakeven on the calls is at $39.35.)

The fund, which holds major companies like Tencent, China Construction, and China Mobile, has already delivered almost triple the performance of the S&P 500 so far in 2017. One analyst's review found the country’s shares traded for barely seven times earnings at the end of December, making them at that time the world’s cheapest for a major country. 1

Beijing’s numbers have been on the upswing, as well, with gross domestic product and retail sales beating estimates on January 20.2 A purchasing managers index for January beat estimates about two weeks later.3

Changes in monetary and foreign-exchange policies have been a third potential positive for FXI. Officials raised interest rates on Feb. 3, contributing to a rally in China Life Insurance and prompting Goldman Sachs to predict further increases.4 (Higher rates can draw capital to a country.)

Taking it all together, bulls are taking note and have jumped in. 

1. Norbert Keimling of StarCapital: Global Stock Market Valuation Ratios 12/30/2016

2. Reuters: China GDP beats expectations but debt risks loom 1/20/17

3. RTT News: China Manufacturing PMI Slips to 51.3 in January 1/31/17 

4. Barron's Asia: Why Is China Life Insurance Soaring? 2/5/17