A way to play the China stock breakout using options following the big stimulus there
U.S. investors have heard the investment adage “Don’t fight the Fed,” which suggests investors should not make investments contrary to the policy objectives of the nation’s central bank. This is because monetary policy, whether through interest rates or asset purchases (aka “quantitative easing” or, effectively, money printing), has profound implications for asset prices, borrowing costs, and market sentiment. The Fed effectively cut rates to zero during the pandemic plunge, and the S & P had an extraordinary bull market. The Fed began raising rates in early 2022 (an action the market had anticipated due to persistently high inflation), and the S & P fell more than 20%. With the most recent action, cutting by a half percentage point, one might be inclined to press longs in the S & P. The challenge is that S & P valuations are rich, and the current U.S. bull market is a bit long in the tooth. There may be an alternative. The Fed is not the only central bank. The People’s Bank of China (PBOC) also cut rates for the world’s second-largest economy (the largest if one uses purchasing power parity as the measure). They needed to; China’s economy has been struggling mainly due to the slow-moving train wreck of its debt-burdened real estate bubble, and they’re taking a page from the Fed’s playbook during the GFC. Another parallel to the GFC-era Fed action for PBOC is that this has also weighed on Chinese equities. Many of their most globally well-known publicly traded companies’ stock prices remain far below their all-time highs a few years ago, even as they’ve been growing the underlying businesses. How to play it Consider PDD Holdings . PDD Holdings Inc. is a multinational commerce group that owns and operates several online platforms. It is possibly best known for its primary business, Pinduoduo, one of China’s largest e-commerce platforms. If you use the internet in the U.S., you’ve also seen banner ads for Temu. This global e-commerce platform serves customers in various countries, including the United States, with a similar model of discounted group buying employed by Pinduoduo. PDD YTD mountain PDD Holdings, YTD The share price is nearly 44% below the all-time highs of early 2021. FY revenues ending December 2020 were just over $8.6 billion USD. Over the past 12 months? 47.3 billion. With FY 2024 adjusted EPS estimated to be over $12 per share, it’s growing the topline in the high double digits yet trading less than 11 times earnings. As a bonus, after reviewing 22 technical indicators, 15 provided bullish signals. o be sure, investing in Chinese companies does carry some meaningful risks. With one-party rule, a capricious government can get involved at any time, for any reason…or no reason. There are plenty of examples of dodgy accounting among Chinese companies, too. Nevertheless, it is also true that China is building some remarkable businesses. PDD’s business model is proven, even if we look only to U.S. e-commerce giants as evidence that it works and as a template for Chinese companies to follow. The trade: The rate cut jump-started several large Chinese stocks and the ETFs that follow them. I, therefore, like mid- to longer-dated calls in any of those ETFs, including FXI , ASHR , and KWEB . If you’re looking for a single stock to get involved with to hitch your wagon to PBOC’s train, consider PDD Holdings. I’ve provided an example of a long call spread trade below. Buy PDD Jan. $130 call Sell PDD Jan. $150 call ISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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