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The ferocious rally in Chinese stocks over the past week has underscored one of the key rules of the market: always keep an eye on the crowd.
Just before a long market holiday, authorities in Beijing sent a strong message that enough is enough. The economy has stalled (by Chinese standards, most Western countries would be happy with growth of just over 4.5%) and the stock market has been bleeding for months.
So central banks and other authorities have launched a flurry of recovery measures, from easing interest rates to relaxing demands on banks to pad their foreign exchange reserves, to directly boosting stock markets and promising more fiscal support. did. Are these fiscal measures very detailed? No. If interest rates were lowered by even a small amount, would the long-suffering real estate sector turn around? And no. But do traders care about it? Again, no.
As a result, face rip-off rallies have continued for years. The CSI300 index of Chinese stocks has risen more than 20% in less than a week. Hong Kong’s Hang Seng Index has been the world’s best-performing major market this year, rising 30% compared to 19% for the US S&P 500 index.
Timing played an important role here. The general assumption was that the Chinese government would hold out much longer before taking this kind of action. Scale also matters. Deutsche Bank says the fiscal stimulus is a “huge deal” and the country’s third-largest in history measured by the size of the economy, a Mario Draghi-style “do it all” moment.
It could be several months before the actual economic impact is known. But the market isn’t hanging around to find out. That’s because before this injection of support, investors were simply allergic to China. Bank of America’s regular survey of fund managers last month found that “macro pessimism is centered around China,” with growth expectations at their lowest in the three years the bank has been conducting this survey. It turned out that there was.
Around the same time, I spoke to Amundi’s chief investment officer, Vincent Mortier, who said he had “never seen such a huge backlash” from clients to the idea of putting money there. No,” he said. Although he had argued that it would be unwise to avoid China altogether, the conversation did not start. The gamble was “completely, completely wasted,” he said.
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Unfortunately, a hedge fund manager told me this week that he tried to use that as a trigger for a Chinese takeover, but backed out. As any good professional investor will tell you, the time to buy is when everyone seems to hate a particular corner of the global market. But it can be difficult to muster up the courage.
This year is not the first time the power of positioning has been demonstrated, with Japan being a prime example. The Bank for International Settlements said in its quarterly market review earlier this month that “concentrated hedge fund positions” played a key role in the speed and scale of Japan’s “turmoil” in early August.
According to the BIS, carry trades (selling a currency with a lower interest rate and buying a currency with a higher interest rate) were unusually popular in the hedge market in the lead-up to the currency realignment in August. This meant that for the period starting in 2022, there was a large amount of speculative money buying dollars at the expense of the yen, a force that helped drive the yen to multi-decade lows. Carry trades and related bets on the volatility of the U.S. stock market have come to have an unusually large impact on hedge fund returns.
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At the same time, speculators were also drawn to buying Japanese stocks. This was all fine until early August, when suddenly it wasn’t. Concerns about U.S. economic growth, which raised expectations for interest rate cuts, have hurt this strategy on multiple fronts, particularly as the dollar has weakened against the yen and stock prices have become more volatile. The exit from this series of correlated trades turned out to be crowded at the exit.
The alarming decline in the dollar-yen exchange rate and a particularly frightening double-digit drop in the Japanese stock market on Monday, the biggest decline since the crash 30 years ago, have cast a shadow over Buy Japan. A popular article. “The combination of congestion and high leverage sets the stage for amplified stress and cross-asset spillovers,” the BIS report said.
Other examples are easy to find, such as the accumulation of huge bets on US chipmaker Nvidia. Nvidia stock became overcrowded over the summer, losing a third of its value in six weeks.
With all this in mind, it’s worth looking now for points of greatest consensus among investors, in case it makes sense to take the other side. For example, the same BofA study that identified China as a contrarian buyer also noted that investors are avoiding commodity buying at the largest scale since 2017.
Thematically, the biggest consensus point is a soft landing for the US economy, an expectation held by almost 80 percent of fund managers. All these smart people can’t all be wrong about something, right?
katie.martin@ft.com
