Hang Seng daily
Was it harder to buy Chinese stocks yesterday as the Hang Seng broke below the 15,000 level and touched the lowest since October 2022? Or harder to buy today after a 2.6% bounce on a report that China could line up $278 billion of money to be poured into stocks along with some local stimulus?
This is more of a philosophical question than a dive into China-specific fundamentals.
In any market that’s in a rout, you have to ask if you want to try and catch the falling knife, or wait for a catalyst. Moreover, when the catalyst comes will you know it?
In general, the best move is to wait for a catalyst but that comes with a reminder that you will never get the bottom and that most-likely you will be chasing a market that has just jumped (shares of BABA today are up 8%, for instance). So while the textbook says to not to catch the knife and to wait, in reality it’s hard to chase a big green candle.
In terms of catalysts, some are clearer than others but rarely (never?) is there a clear buying signal. In this case, the report is based on ‘sources’ from a country that’s notoriously tight-lipped. We’ve also see numerous instances over the past year of supposed catalysts (rate cuts, stimulus) that have floundered. In 2008 at the bottom of the US financial crisis (SPX at 666 compared to 4860 now) there was no catalyst, it came after weeks of relentless selling.
Psychologically, I think it comes down to conviction. You might look at valuations, growth, outline geopolitical risks and try to develop a strong view. Secondarily, look at the psychology of the market.
Two things about China stand out to me:
1) Foreign ETFs are rare in China but the US ETF is trading at a 10% premium to NAV and the Japan ETF at a 15% premium to NAV. Those are non-nonsensical moves for investors who are disillusioned with the local market.
2) Puking: Major bottoms are characterized by traders and funds getting blown out. The latest trading in China has begun to look like that and yesterday a 30-year old Asia-focused hedge fund announced it was shutting down after falling 18.8% on China bets in the first few weeks of the year.
This is a sad letter to read but it’s what you want to see if you’re looking to buy a bottom:
The psychology of this fund manager is what a market at the bottom looks like. That said, it can always get worse so trade with a plan and a stop loss. There’s no reason to YOLO on China or anything else.