Case Study (Event-driven Strategy): Short HSI - 7 Oct 2024 to 9 Oct 2024
1. Macro Environment Background
- China's 10 Trillion Yuan Stimulus Package: On 24/9/2024, China’s central bank unveiled a 10 trillion yuan stimulus package aimed at boosting the stock market and property sector to revive the economy.
- Market Reaction Before National Day (1/10/2024): Optimism surged ahead of the holiday, with the CSI300 up 23.4% and the Hang Seng Index rising 15.8% in just five trading days.
China's stock market closed for a week, from 1/10 to 8/10, while the Hong Kong market resumed trading earlier, on 2/10.
2. Scenario Analysis
- Hong Kong Stock Market Performance During National Day Holiday: From October 1 to 7, 2024, Hong Kong had four active trading days, during which stocks surged with record-high trading volumes and a cumulative gain of 11.3%.
- Drivers of the Stock Market Rally: With China’s markets closed during the holiday, investors turned to Hong Kong A-shares to continue the rally. The sharp rally was driven by optimism from fund inflows into Chinese stocks, alongside short covering by hedge funds and domestic investors.
Stock Mortgages and Short Covering:
- In China, major shareholders can mortgage their shares to banks or brokerage firms for capital. During the market drop in February 2024, 41% of mortgaged stocks (around 2,500) hit margin call levels.
- We believe the short covering of these mortgaged stocks contributed significantly to the nine-day rally. However, as policies are still pending and uncertain, short selling may resume once prices rise.
3. Strategy Selection
- Post-Holiday Outlook for Hong Kong and Mainland Markets: We anticipate a siphon effect as China’s market reopens, with foreign investors likely selling Hong Kong stocks to buy A-shares, leading to potential capital outflows from Hong Kong.
- Market Valuations and Sentiment: After two weeks of gains, Hong Kong stock valuations have rebounded from undervalued levels, and short-term sentiment seems overextended. This may trigger profit-taking and increased market volatility.
- Outlook for Future Gains: Further gains will rely on fundamental improvements as fiscal policies take effect and sentiment stabilises. With the Hang Seng Index up over 30% in the past month, a market correction is likely as focus shifts back to mainland markets.
Scenario Risk: Low
4. Asset Class Selection
We decided to short the HSI due to its stretched pricing, with both RSI and MACD indicating an overextended market. At current levels, upside risk appears minimal.
Position Risk: Low
5. Execution and Ongoing Monitoring
We identified the hours before China's market reopening as an opportune moment to establish a short position on the HSI, supported by low risk ratings for both narratives and positioning, along with key indicators:
- Market Convergence: A potential rotation from Hong Kong to China due to the "holiday window" in the Hong Kong market.
- Stretched Valuations: Various technical indicators showed that HSI price levels were significantly overstretched.
Entry point:
- 2024-10-07: Short HSI October future contract at 23,170
Exit point:
- 2024-10-09: Exited at 20,550
