FOMO Grips China Traders in World’s Wildest Stock Market

(Bloomberg) – The world’s most heartbreaking stock market reversal is getting even more extreme as traders bet China’s Covid Zero easing campaign has yet to continue.

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Frenzied trading amid fear of missing out on a rally sent a measure of the volatility of a key Chinese stock indicator to world highs, after weeks of turmoil that saw Xi Jinping’s show of power at the Congress of October party and a wave of lockdowns amid rising Covid cases. Sparking optimism, authorities on Friday reduced quarantine periods and scrapped flight bans in a decisive turn, helping the Hang Seng China Enterprises Index cap its best two-week gain in more than seven years.

Traders are hanging on to even the smallest signs of easing that could spur a long-term rally, after restrictions crushed growth in the world’s second-largest economy. For investors, the stakes are high in a market that is known for long stretches of choppy trading followed by huge surges in a short period of time, such as in the wake of the global financial crisis. Missing out on such gains could be costly.

“As we get closer to the end of the year, this volatility should remain in place although there is a real change in tone from the Chinese government towards Covid,” said Sat Duhra, portfolio manager. at Janus Henderson Investors. There also “seems to be a real sense of ‘FOMO’ regarding a China rebound among Asian investors,” he added.

Volatility was evident in Friday’s trading, with the Hang Seng Index posting its biggest one-day gain since March and U.S.-listed Chinese stocks rallying across the board. Shares of Chinese property developers posted double-digit gains as Beijing ramped up financial aid, including $56 billion in new funding for the struggling sector, according to a Bloomberg News report.

Some brokerages are seeing an increase in account openings and margin lending. Saxo Capital Markets said margin lending on Hong Kong equities doubled in the first week of November from the prior period. Bright Smart Securities, one of Hong Kong’s largest brokers, saw a 25% increase in account openings earlier this week.

Options data also indicates a more bullish tone. Average call option volumes on the Hang Seng China Enterprises Index have exceeded the number of put options by about a third over the past 20 days, according to data compiled by Bloomberg. On Friday, one of the most actively traded contracts on the gauge was a call option expiring March 30, betting about a 36% upside from Friday’s close.

A mix of short hedging and buying battered reopening, tech and real estate stocks contributed to stock volatility, with the Hang Seng China Index’s realized 10-day moves above benchmarks world. The yuan also swung violently across its tightly managed trading band like never before as pessimism turned to optimism.

The advance made Hong Kong’s gauges the best performer in the world this month after being the worst for most of the year. The Hang Seng China index rebounded 19% from an October low, cutting this year’s losses to 29%, although it remains one of the biggest losers among the 92 global benchmarks tracked by Bloomberg.

Valuations and weak positioning are cited as the main reasons to buy, although investors remain wary of false dawns. Hong Kong’s benchmark Hang Seng index is trading near its lowest price-to-book ratio on record, while the mainland’s CSI 300 index is near its lowest forward price-to-earnings multiple since the early days of the pandemic.

Active fund managers find it particularly difficult to sit on the sidelines, which can leave them vulnerable to underperformance against benchmarks after selling off large portions of their holdings over the past two years. . China and Hong Kong together account for around one-fifth of the weighting in the MSCI Asia Pacific Index.

“In a potential year-end rally, many investors could feel pressure to trim their underweight positions, making the rally self-reinforcing,” said Winnie Wu, China equity strategist at BofA Securities. She said around 60% of investors surveyed by BofA at their recent China conference said “reopening” was the most important factor for them to become “more positive” about China.

BNP Paribas’ Energy Transition fund bought Chinese electric vehicle and battery stocks at “attractive” valuations after congress after party declined, co-manager Edward Lees said in an interview. The fund has doubled its exposure to China since the start of the year.

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Certainly a resurgence of Covid cases in parts of the country is tempering expectations of big changes in Covid Zero policy. With China still offering no direction as to when it will fully end Covid Zero, volatility is likely here to stay.

“We are not ready to beat the table on Chinese equities and believe they will remain volatile in the near term,” said Xin-Yao Ng, Asian equity investment manager at abrdn plc. But “there are risks in betting too hard against China at this stage”.

–With help from Abhishek Vishnoi, John Cheng, April Ma and Henry Ren.

(Updates to add details on Friday’s exchanges and Chinese property sector support report in fifth paragraph)

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