Too much love for stocks seen benefiting from artificial intelligence software and not enough for those from China equals is creating a big opportunity for contrarian play.
That’s according to Bank of America’s chief strategist Michael Hartnett, writing in the Friday “Flow Show,” who said: “Tech stocks have discounted [a] June Fed pause, leaving China stimulus as bullish June surprise….contrarian June trade is ‘buy HSI, sell AI.’”
Indeed, after skirting a bear market this week, the Hong Kong Hang Seng Index
HSI,
came roaring back on Friday, closing more than 4% higher. The index is down 4.2% year to date, versus a 9.9% gain for the S&P 500
SPX,
and a 25% surge for the Nasdaq
COMP,
which has been fueled in part by enthusiasm over AI.
While investors were encouraged by a U.S. debt-ceiling deal that cleared a final hurdle in Congress and were digesting the May employment report, hopes for a Chinese fiscal or monetary stimulus may also have been in the mix on Friday. Bloomberg reported, citing sources, that the government is readying fresh support for the property market after policies already in place were not helping much.
The Chinese yuan
USDCNH,
also moved higher against the dollar.
On Wednesday, the Hang Seng fell 1.9% to 18,234.27 — a 19.6% drop from its closing high of 22,688.90 on Jan. 27. A 20% drop from a recent closing high is a popular definition of a bear market. The index fell modestly on Thursday, but was still hovering around bear market territory with a 19.7% drop from that January high.
The fall came after an official read on China manufacturing gauge, though that was followed Thursday by an unofficial manufacturing survey that was slightly more optimistic.
Chris Weston, head of research at Pepperstone said Hong Kong indexes falling into into bear-market territory have sparked interest among clients in risk-reward plays, one of the key reasons being the possible need for China to stimulate its economy.
Among the reasons the Hang Seng and China stocks have floundered, is economic data that has mostly missed the mark since mid-April, with concerns over possible property developer defaults, sour headlines on China-U.S. relations, as well as opportunity costs, he said in a note.
As well, he noted China/Hong Kong stocks have fallen out of favor, while U.S. mega-cap tech and global AI names have soared, alongside strong stock performances in Japan
NIK,
and Korea
180721,
— up 20% and 16%, respectively, year-to-date. Hong Kong heavyweight Tencent
700,
has sat out a tech rally, up just 5% year to date.
He said capital flows were positioned to take advantage of pent-up post-COVID demand in the region, saying they are “currently positioned for a short-term bounce, with 3 in every 4 open positions held long.”
Weston said data on China trade, consumer prices and new yuan loan are all due next week, and poor numbers could hit stocks again and “accelerate the need for stimulus.” As for now, he said he’d want to see follow-up on that rally Friday before swaying his view of a technical short.
