17.11.2022
Updated observations on China re-opening
Last week our Sales exposure to China note demonstrated how Qi can help investors measure the impact of a potential China re-opening trade.
The Watchlist below is a curated list of Western companies across sectors who derive a large percentage of their revenue from sales to China.
We update now because the change since last Tuesday is notable. Then the picture was mixed - there was almost a 50:50 split between stocks that were cheap to macro versus that were rich to model.
Now valuations are skewed rich. Semiconductors (Qualcomm, Lam Research, AMT, Broadcom) remain the laggards &, for the bulls, offer the most efficient upside. The rest have all discounted a fair degree of good news on the macro front.
The Watchlist below is a curated list of Western companies across sectors who derive a large percentage of their revenue from sales to China.
We update now because the change since last Tuesday is notable. Then the picture was mixed - there was almost a 50:50 split between stocks that were cheap to macro versus that were rich to model.
Now valuations are skewed rich. Semiconductors (Qualcomm, Lam Research, AMT, Broadcom) remain the laggards &, for the bulls, offer the most efficient upside. The rest have all discounted a fair degree of good news on the macro front.
Of the five with the richest valuations on Qi, three are mining stocks. None are in regime so there's an immediate health warning.
But it does prompt the question - is there a message from the commodity sector about the China re-opening trade?
It doesn't matter if we look at spot commodities, tracking ETFs or mining / resource stocks, the answer is the same. The sector is rich to macro.
This time everything is in regime & we can see:
But it does prompt the question - is there a message from the commodity sector about the China re-opening trade?
It doesn't matter if we look at spot commodities, tracking ETFs or mining / resource stocks, the answer is the same. The sector is rich to macro.
This time everything is in regime & we can see:
* Both spot copper & the JJC ETF are around 16% rich to model.
* The nickel ETF JJN is 23% above model.
* Copper miners ETF COPX is 24% rich to macro & back-tests best (73% hit rate, +6.8% average return)
* The nickel ETF JJN is 23% above model.
* Copper miners ETF COPX is 24% rich to macro & back-tests best (73% hit rate, +6.8% average return)
Each time the valuation gap has arisen because model fair value is moving sideways - the recent moves higher have not been supported by macro fundamentals.
There are slight differences between assets & their key drivers. Some emphasise inflation, others the policy stance of Central Banks.
However, a consistent theme throughout is all these models show USDCNH as the biggest negative driver. They all want a stronger Yuan - a reflection of a stronger Chinese economy.
USDCNH has now retraced around half of the fall seen thus far in November. If the Dollar bounces more, these China re-opening plays could be vulnerable.
Qi has no insight on whether Beijing will ease its Zero Covid policy. China watchers are your best bet there.
But we can provide a framework to help investors identify any laggards for China bulls, & the markets that have potentially overshot & look vulnerable if this story loses momentum.
However, a consistent theme throughout is all these models show USDCNH as the biggest negative driver. They all want a stronger Yuan - a reflection of a stronger Chinese economy.
USDCNH has now retraced around half of the fall seen thus far in November. If the Dollar bounces more, these China re-opening plays could be vulnerable.
Qi has no insight on whether Beijing will ease its Zero Covid policy. China watchers are your best bet there.
But we can provide a framework to help investors identify any laggards for China bulls, & the markets that have potentially overshot & look vulnerable if this story loses momentum.
