Finally… some good news. And before we get to this week’s free trade in Chinese stocks — surprising, I know — let’s spread some holiday cheer!
I’ve been discussing over the past month how the omicron variant of COVID-19 appeared to be the mutation we’ve been waiting for… One that’s more transmissible, but less severe. One that transforms this deadly pandemic into a milder endemic disease.
But what I had not seen yet was reliable data… until now.
Studies out of Scotland and South Africa were released early Wednesday that show a two-thirds reduction in the risk of hospitalization for omicron cases versus earlier variants.
To be clear, it’s still early, the sample size is small and I haven’t seen granular details on the data yet. As such, I have no idea of the effect on vaccinated versus unvaccinated populations, or across other demographics. We’ll know more later…
But we all need some good news to talk about right before the holidays, and I’ll take what I can get.
Although coverage on the topic at CNBC is nowhere to be found, it is at least covering the FDA’s announcement that Pfizer’s COVID-19 pill treatment was approved by FDA.
Bloomberg, however, is all over it, along with one other topic of interest…
Source: Bloomberg
While the omicron variant study will certainly get the clicks and eyeballs — as it should — the headline on the end of Donald Trump’s China Trade Deal made me want to start digging a little.
First off, I think it’s well known that China hasn’t even come close to the trade promises it made during the deal’s negotiations.
Most of us in the analyst world never thought Beijing stood a chance.
Why Now Is the Time for Trading Chinese Stocks
Some thought President Xi Jinping was just placating former U.S. President Donald Trump to manipulate him into easing off — with no real intention of fulfilling his end of the deal.
The pandemic rendered all those speculations moot — it’s hard to import or export anything at all when your country is closed for a month.
And when it did reopen, exports to the U.S. surged as Chinese manufacturers tried to catch up with demand. The result was a widening of the trade imbalance rather than the opposite — which was intended by the deal.
Source: China Customs
Despite all the difficulties, Chinese imports from the U.S. did actually reach new record highs…
But that huge ramp in exports should have implied a successful year from a revenue standpoint.
Instead, their market looked like this through November…
Source: Bloomberg
The culprit here was one of the nastiest ramp-ups in inflation China has ever experienced outside of 2019.
Source: Bloomberg
And that was accompanied by the largest slowdown in GDP in history…
Source: Bloomberg
The combination of those two factors are generally bad for equities, as is the inability to pass on that inflation to customers — in this case, the U.S. — which squeezes margins.
But when prices DIS-inflate — remember, I called peak inflation back on Dec. 10 — then margins accelerate and markets rise.
When I looked at the Chinese stock market over the past month, I was a little surprised when I saw higher highs and higher lows.
Source: Bloomberg
But then I took a look at China’s “Credit Impulse” — new credit issued as a percentage of GDP — and saw that after a year of declines, it started to tick up again.
Source: Bloomberg
This is a predictive metric for commodity prices, as it projects inflationary and deflationary pressures on commodities up to 12 to 18 months in advance. For instance, it peaked in November 2020, and commodities peaked in December of this year.
Moreover, it’s a darn good predictor of turnarounds in the Chinese stock market.
Source: Bloomberg
Pretty interesting.
Now, for the next few months, I had wanted to target some opportunities that can capitalize on a decline in inflation.
Our watchlist members, however, are more the beneficiaries of the last commodities and sectors that are inflating. They’re all green over the past two sessions, and I definitely still like them… I just want to diversify a bit and find something flat to down.
Source: Fortune Research, Bloomberg
And it just so happens that one of the strongest China-focused ETFs were flat Wednesday within a bullish formation.
So for this week’s FREE TRADE, we’re trading some Chinese stocks and highlighting the Kraneshares Bosera MSCI China A ETF (NYSEArca: KBA), which looks set up for fantastic returns over the next few months.
Source: Bloomberg
We’ll find some more disinflation plays to add in but with the holidays looming, most of those adjustments will likely take place in 2022.
I’m going to share some other interesting ideas, too…
So keep an eye on that inbox, and I’ll catch you then… updated watchlist below.
Source: Fortune Research, Bloomberg
All the best,
Matt Warder
Fortune Research
