Time for a Course Change in Chinese Stocks?
Editor's note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.
For years, the Chinese equity markets offered traders and investors an opportunity to capitalize on one of the fastest-growing economies in the world. However, those fortunes reversed course in February 2021, when the Chinese equity markets took a turn into bear market territory. But in the past few weeks, many Chinese stocks have been on a tear and surged higher. This begs the question: Are the worst of the country’s economic woes behind them, or is this merely a short squeeze in a bear market that’s set to continue?
Recalibrating the Market’s YINN and YANG
China has faced numerous fundamental headwinds in recent years. The country’s zero-Covid policy has put a damper on economic growth, and there’s also been significant issues with its real estate market. Despite warnings about the risks of inflation, the People’s Bank of China (PBOC) has been targeting liquidity injections into its real estate market to try and maintain demand. There’s also been higher-than-usual geopolitical tensions between the U.S. and China recently, which has escalated financial risks in the region. But for traders that think the bad news is already priced in for this market, Direxion offers a Daily FTSE China Bull 3X Shares (Ticker: YINN), which seeks to provide 300%, before fees and expenses, of the daily performance of the FTSE China 50 Index.*
Below is a daily chart of YINN as of November 17, 2022:
Source: TradingView.com
Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For the most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.
Is an Economic Slowdown Inevitable?
As China proceeds with its aim to expand its domestic consumption and increase its middle class, the rising cost of goods and services remains a threat to discretionary income levels. Thus, the PBOC is expected to remain focused on balancing out the risks of rising inflation while maintaining liquidity. As we head into the winter months again and the traditional cold and flu season, China’s zero-tolerance Covid policy could remain an economic headwind. For traders that think inflationary risks are too big for the country’s middle class to overcome, as well as the additional risks associated with public health policy, Direxion’s Daily FTSE China Bear 3X Shares (Ticker: YANG), which seeks to provide 300% of the inverse (or opposite), before fees and expenses, of the daily performance of the FTSE China 50 Index,* could provide an opportunity.
Some of the major holdings in YINN and YANG (as of 9/30/2022) include Alibaba Group (Ticker: BABA) [8.93%], Tencent Holdings (Ticker: TCEHY) [8.93%], and JD.com (Ticker: JD) [6.08%]. Alibaba just reported its Q3 earnings on November 17. Results were $1.82 earnings per share (EPS)* compared to analyst estimates of $1.70. Tencent posted mixed results on November 16, but still exceeded analyst estimates of $0.45 EPS by reporting actual results of $0.47. JD.com is set to report on November 18, and analysts are looking for $0.52 EPS. If JD.com misses on estimates, it could be a boon for YANG.
Below is a daily chart of YANG as of November 17, 2022:
Source: TradingView.com
Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For the most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.
Additional China Plays
Traders looking for less leverage to trade Chinese equities may consider Direxion’s Daily CSI 300 China A Share Bull 2X Shares (Ticker: CHAU), which seeks to provide 200%, before fees and expenses, of the daily performance of the CSI 300 Index.* Traders looking for a more concentrated bet in the Chinese equity market may consider opportunities with Direxion’s Daily CSI China Internet Index Bull 2X (Ticker: CWEB), which seeks to provide 200%, before fees and expenses, of the daily performance of the CSI Overseas China Internet Index.*
* Definitions:
- Earnings per share (EPS) is a company's net profit divided by the number of common shares it has outstanding. EPS indicates how much money a company makes for each share of its stock and is a widely used metric for estimating corporate value.
- FTSE China 50 Index (TXIN0UNU) consists of the 50 largest and most liquid public Chinese companies currently trading on the Hong Kong Stock Exchange as determined by FTSE/Russell.
- CSI Overseas China Internet Index (H11137) is provided by China Securities Index Co., LTD and is designed to measure the performance of the investable universe of publicly traded China-based companies whose primary business or businesses are in the Internet and Internet-related sectors, as defined by the index sponsor, China Securities Index Co., Ltd. (‘‘CSI’’).
- CSI 300 Index (CSIN0301) is a modified free-float market capitalization weighted index comprised of the largest and most liquid stocks in the Chinese A-share market.
An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.
Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged, or daily inverse leveraged, investment results and intend to actively monitor and manage their investment.
Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, and risks specific to Chinese securities, including Chinese Government Risk, Chinese Markets Risk, Chinese Currency Risk, and Hong Kong Securities Risk. The Chinese economy is generally considered an emerging market and can be significantly affected by economic and political conditions and policy in China and surrounding Asian countries. Securities from issuers in emerging markets face the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market shutdown and more government limitations on foreign investments than typically found in more developed markets.
Additional risks include, for the Direxion Daily FTSE China Bull 3X Shares, Daily Index Correlation Risk and for the Direxion Daily FTSE China Bear 3X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.
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