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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.
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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:
* 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)
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.
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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.
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