How to Manage a Potential Chinese ‘Bazooka’

Investing.com — Recent announcements of stimulus from China have prompted investors to consider how to position themselves for a possible significant economic boost from Beijing, often referred to as a “bazooka” stimulus.

In a note released on Tuesday, analysts from Barclays acknowledge that while this scenario isn’t their primary expectation, it is prudent for investors to prepare for it given its potential to greatly influence global markets.

Although Chinese equities have recently experienced notable gains, the overall market response has been relatively calm, suggesting there are opportunities in other asset classes. The CSI 300 index has recorded some of its most extreme movements, including a remarkable one-week change of +17.6.

According to Barclays analysts, the size of these fluctuations indicates that investors were not fully prepared for such announcements, and technical factors like market positioning may have provided additional support. They also point out that while there might still be room for further growth, much of the immediate upward movement may have already occurred.

The rally has primarily affected Chinese equities and related sectors, like European mining companies. However, Barclays argues that the true impact could arise if China reveals a substantial fiscal stimulus plan, such as a CNY 10 trillion initiative over two years. In that case, the effects could cross borders, creating opportunities in non-Chinese assets.

Analysts suggest that in a “bazooka” stimulus scenario, the ramifications would likely extend to global assets, presenting attractive upside opportunities for these non-Chinese investments due to less extreme market movements and lower volatility.

Barclays has proposed several strategies to leverage this potential, focusing on sectors such as oil, industrials, and U.S. stocks with significant exposure to China. For instance, they recommend purchasing calls on the U.S. Oil Fund, contingent on the euro strengthening against the dollar, as oil tends to respond positively to unexpected increases in Chinese demand.

Another opportunity lies within the industrial sector, where Barclays suggests buying hybrid call spreads on the XLI (Industrials) versus SPY (S&P 500). Historically, the Chinese credit cycle has been a strong leading indicator for the performance of industrials, and a major stimulus could significantly boost this sector.

Finally, for those seeking direct exposure to U.S.-China trade, Barclays identifies companies with high sales exposure to China that also possess favorable volatility profiles. Top candidates include Wynn Resorts, Western Digital, and Las Vegas Sands, all of which could see substantial gains if China’s economy rebounds due to stimulus efforts.