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Strategist Who Called China Stock Rally Sees More Gains

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Strategist Who Called China Stock Rally Sees More Gains

(Bloomberg) — A Bank of America Corp. options strategist who has correctly anticipated gains in the past now says the rally that has made Chinese stocks the world’s best this year may have even more room to run. And many are positioning themselves for it.

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Demand for bullish bets has increased since the country announced a slew of initiatives to revive the economy, said Lars Naeckter, head of equity derivatives research in the Asia-Pacific region. The cost of calls versus puts is near the highest level since at least 2008, both for Chinese stocks listed in Hong Kong and for a U.S. exchange-traded fund that tracks the shares.

While the Hang Seng China Enterprises Index has given up almost half of its recent gains, Naeckter says the market could rise even further given the country’s political pivot and investors’ willingness to get back into trading. In early September, when the stock gauge was near bottoming, he recommended a bullish option structure that returned more than 360%. Hang Seng Enterprises rose in early trading on Friday.

“The opportunities are still there,” Naeckter said in an interview in Hong Kong this week. “There is significant upside potential for this market from here as we balance uncertainty with ongoing stimulus in terms of size and timing.”

Like Bank of America, other companies see the prospect of more profit. At Goldman Sachs Group Inc. the Hang Seng Enterprises trading desk last week recommended call spreads and collars – buying puts and selling calls – to take advantage of increased implied volatility.

Bank of America earlier this month recommended converting September’s Hang Seng Enterprises trade into spread collars for November/December, which will also cover the upcoming US presidential election. The company expects volatility to remain high until the vote and decline thereafter. In addition, Naeckter’s team proposed bullish options strategies on the US-listed iShares China Large-Cap ETF.

“There will be continued noise between the US and China and continued uncertainty around that,” Naeckter said in the interview on Monday. “For market participants, however, the bigger elephant in the room is China’s policies and the meetings that are coming.”

Investors are awaiting the meeting of China’s top legislative body, the Standing Committee of the National People’s Congress, in the coming weeks as it will have to approve any additional fiscal budgets or bond quotas.

China’s stock market has been on a rollercoaster since late September, when a raft of stimulus measures unleashed a burst of optimism that is now cooling off. As Beijing takes its time to hammer out a fiscal spending plan, skepticism is growing over whether authorities are willing to deploy more firepower to restore the economy and markets.

Also read: Chinese stocks slide into correction as stimulus hopes fade

At a derivatives trading forum in Hong Kong on Monday, Peter Yip, head of currencies and emerging markets at JPMorgan Chase Bank, was among those who noted that demand for Chinese hedges has also increased given questions surrounding the country’s stimulus plans , the prospects for global interest rate cuts and the US elections.

Moreover, investors want to avoid a repeat of 2015’s boom-and-bust period, when Chinese stocks spiraled out of control to a seven-year high amid disappointing economic growth – a situation that is unsustainable in the long term, they say Naeckter. .

“There remains a healthy dose of skepticism, which is good in the sense that we may not be moving too much in the positive direction,” he said.

–With help from Sangmi Cha and Henry Ren.

(Refreshes chart for last close, adds Friday trading in third paragraph)

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