GOCM_CHINA_A_SHARES_JUSTIFY_YOUR_LONG
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MACRO FLASH NOTE Contact the Team Toll Free +1 844 579 8633 Marcus L. Martin II Head of Global Sales & Trading [email protected] Lucille DeSario Head of Business Development [email protected] Giovanni Moranelli Pan-EMEA Sales & Trading [email protected] Josh Granite Pan-Asia | Americas Sales & Trading [email protected] THE SETUP: While the markets are broadly aware of the current Chinese A share market mega-rally, many are unaware of why it is happening and what to do next, particularly if you are reading street research, which, only 12 months ago held a consensus view that China could rally +/-25% on the high end over a 12 month period. After the gap up started in early summer 2014 (Shanghai exchange link opened for domestic participants only at the time, then opened in the fall of 2014 for select foreign investors), local and international research houses quickly chased what would be a continuous series of “re-ratings”. From a pure valuation perspective, SHCOMP now trades at a current P/E of roughly 24.5x, relative to S&P currently at 18.4x. Despite all the street “re-ratings”, the profit margins for the underlying companies on the SHCOMP have eroded for a 3 rd year in a row while EBITDA margins have also compressed vs. the same 3 year period where S&P components have strengthened at the bottom line. The simple fact is the SHCOMP is a People’s Bank of China (Central Bank) driven flow show. The QE and ongoing easing policies, such as: reduction in reserve ratio requirements, increased lending policies and easing margin requirements (all modeled after the US Fed’s “zero rate policy”) is forcing every “saver” into the equities markets and increased the appeal for investors to remain involved. The interesting and little discussed fact is the phantom asset demand potential driven by Chinese regional governments during the housing and investment bubble which are now being securitized and sold back into the market as SHCOMP officials recently (and continually) increase the monthly IPO listing limits. As domestic retail drove the initial foray, foreign investors have joined the party well after the Dom Perignon ran out. The flow show has now become the 2 nd largest equity market in the world with over $322bn USD trading last night. Current foreign demand can now be attributed to ETF, HFT and Indexers. The ETF market (ASHR US, PEK US, CHINA US as examples) continue to explode in volumes, thanks to recent increases in foreign broker dealer access levels. The HFT community loves liquidity strategies and volatility as the old standard of price dislocation strategies or first-in-line strategies are considered antiquated, easily “gamed” and have limited correlation with positive returns these days. While we have found no published data, numerous sources involved in A Share brokerages on Mainland China suggest HFT trading strategies could be as much as 60-75% of daily turnover and valuations, in many cases for HFTs, have little to no effect on “investment decisions”. The final component to the flow show are indexers. Famous actors such as Mark Mobius were adamantly against A shares inclusion into main stream Emerging Market indices. Recently he has reversed his tone, alongside others such as FTSE announcing an inclusion in its indices and the expectation that MSCI will conclude its 2 year study and add A Shares to the EEM index. BOTTOMLINE: We aren’t necessarily Madonna fans here (Justify My Love), nor do we prefer champagne, however the song title makes perfect sense for a SHCOMP remix called “Justify My Long”! While many analysts on the street are hesitant to make the call, we as traders believe you cannot possibly justify your LONG position at these levels. Look for DXY Index @ 100, a SHCOMP 5,000 level or the day after the June 9 th MSCI inclusion announcement as all near term triggers to start a race to lock in profits. THE TRADE (ASSUMING EVERYONE IS ALREADY LONG OR FLAT NOW): IF YOU ARE LONG PRE-2015: Don’t be greedy and risk more than you can explain to your boss or significant other. Close out your LONG, throw a party and serve some Dom (don’t play Madonna though) IF YOU ARE LONG AS OF 2015: Structure a BULL CALL SPREAD or COVERED CALLS and seize the blind euphoria. We estimate a 0% chance the next 6 months returns what the first 6 you missed returned. IF YOU ARE FLAT: You missed it. Wait for a massive pullback (+/- 50%) but don’t hold your breath for it. Privileged/Confidential information may be contained in this message and may be subject to legal privilege. Access to this information by anyone other than the intended recipient is unauthorized. If you are not the intended recipient (or responsible for delivery of the message to such person), you may not use, copy, distribute or deliver to anyone this email (or any part of its contents) or take any action in reliance on it. In such case, you should destroy this information, and notify us immediately VIA EMAIL [email protected] or by calling +1 (843) 408 4601. If you have received this information in error, please notify us immediately by e-mail or telephone and delete the e-mail from any computer. If you or your employer does not consent to internet e-mail messages of this kind, please notify us immediately. The views, opinions, conclusions and other information expressed in this electronic mailing are not given or endorsed by the company unless otherwise indicated by an authorized representative independent of this message. ADDITIONALLY, THIS NOTE IS SALES & TRADING COMMENTARY ONLY. CHINESE A SHARES (SHCOMP) | A Remix of the Famous Song “Justify My Love” FLASH FOCUS GRAPHIC 12 mo performance (in USD): SHCOMP +150.94% EEM US +0.51% Volume 2, Edition 2.1 Wednesday May 27, 2015 Sometimes a simple, yet effective comparative chart does more for the investor’s mind than a 100 page strategy report with sexy numbers moving around to justify your long. Source: Bloomberg, Global Oak Capital Mkts
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5.27.2015 BOTTOMLINE: We aren’t necessarily Madonna fans here (Justify My Love), nor do we prefer champagne, however the song title makes perfect sense for a SHCOMP remix called “Justify My Long”! While many analysts on the street are hesitant to make the call, we as traders believe you cannot possibly justify your LONG position at these levels. Look for DXY Index @ 100, a SHCOMP 5,000 level or the day after the June 9th MSCI inclusion announcement as all near term triggers to start a race to lock in profits.
Transcript of GOCM_CHINA_A_SHARES_JUSTIFY_YOUR_LONG
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MACRO FLASH NOTE [Type the company name] [Pick the date] [Edition 1, Volume 1]
Contact the Team
Toll Free +1 844 579 8633
Marcus L. Martin II
Head of Global Sales & Trading
Lucille DeSario
Head of Business Development
Giovanni Moranelli
Pan-EMEA Sales & Trading
Josh Granite
Pan-Asia | Americas Sales & Trading
THE SETUP: While the markets are broadly aware of the current Chinese A share market mega-rally,
many are unaware of why it is happening and what to do next, particularly if you are reading street
research, which, only 12 months ago held a consensus view that China could rally +/-25% on the high end
over a 12 month period. After the gap up started in early summer 2014 (Shanghai exchange link opened
for domestic participants only at the time, then opened in the fall of 2014 for select foreign investors), local
and international research houses quickly chased what would be a continuous series of re-ratings. From
a pure valuation perspective, SHCOMP now trades at a current P/E of roughly 24.5x, relative to S&P
currently at 18.4x. Despite all the street re-ratings, the profit margins for the underlying companies on
the SHCOMP have eroded for a 3rd year in a row while EBITDA margins have also compressed vs. the
same 3 year period where S&P components have strengthened at the bottom line. The simple fact is the
SHCOMP is a Peoples Bank of China (Central Bank) driven flow show. The QE and ongoing easing
policies, such as: reduction in reserve ratio requirements, increased lending policies and easing margin
requirements (all modeled after the US Feds zero rate policy) is forcing every saver into the equities
markets and increased the appeal for investors to remain involved. The interesting and little discussed fact
is the phantom asset demand potential driven by Chinese regional governments during the housing and
investment bubble which are now being securitized and sold back into the market as SHCOMP officials
recently (and continually) increase the monthly IPO listing limits. As domestic retail drove the initial
foray, foreign investors have joined the party well after the Dom Perignon ran out. The flow show has now
become the 2nd largest equity market in the world with over $322bn USD trading last night. Current
foreign demand can now be attributed to ETF, HFT and Indexers. The ETF market (ASHR US, PEK US,
CHINA US as examples) continue to explode in volumes, thanks to recent increases in foreign broker
dealer access levels. The HFT community loves liquidity strategies and volatility as the old standard of
price dislocation strategies or first-in-line strategies are considered antiquated, easily gamed and have
limited correlation with positive returns these days. While we have found no published data, numerous
sources involved in A Share brokerages on Mainland China suggest HFT trading strategies could be as
much as 60-75% of daily turnover and valuations, in many cases for HFTs, have little to no effect on
investment decisions. The final component to the flow show are indexers. Famous actors such as Mark
Mobius were adamantly against A shares inclusion into main stream Emerging Market indices. Recently
he has reversed his tone, alongside others such as FTSE announcing an inclusion in its indices and the
expectation that MSCI will conclude its 2 year study and add A Shares to the EEM index.
BOTTOMLINE: We arent necessarily Madonna fans here (Justify My Love), nor do we prefer
champagne, however the song title makes perfect sense for a SHCOMP remix called Justify My Long!
While many analysts on the street are hesitant to make the call, we as traders believe you cannot possibly
justify your LONG position at these levels. Look for DXY Index @ 100, a SHCOMP 5,000 level or the day
after the June 9th MSCI inclusion announcement as all near term triggers to start a race to lock in profits.
THE TRADE (ASSUMING EVERYONE IS ALREADY LONG OR FLAT NOW):
IF YOU ARE LONG PRE-2015: Dont be greedy and risk more than you can explain to your boss or
significant other. Close out your LONG, throw a party and serve some Dom (dont play Madonna though)
IF YOU ARE LONG AS OF 2015: Structure a BULL CALL SPREAD or COVERED CALLS and seize the
blind euphoria. We estimate a 0% chance the next 6 months returns what the first 6 you missed returned.
IF YOU ARE FLAT: You missed it. Wait for a massive pullback (+/- 50%) but dont hold your breath for it.
Privileged/Confidential information may be contained in this message and may be subject to legal privilege. Access to this information by anyone other than the intended recipient is unauthorized. If you are not the intended
recipient (or responsible for delivery of the message to such person), you may not use, copy, distribute or deliver to anyone this email (or any part of its contents) or take any action in reliance on it. In such case, you should
destroy this information, and notify us immediately VIA EMAIL [email protected] or by calling +1 (843) 408 4601. If you have received this information in error, please notify us immediately by e-mail or telephone and delete
the e-mail from any computer. If you or your employer does not consent to internet e-mail messages of this kind, please notify us immediately. The views, opinions, conclusions and other information expressed in this
electronic mailing are not given or endorsed by the company unless otherwise indicated by an authorized representative independent of this message. ADDITIONALLY, THIS NOTE IS SALES & TRADING COMMENTARY ONLY.
CHINESE A SHARES (SHCOMP) | A Remix of the Famous Song Justify My Love
FLASH FOCUS GRAPHIC 12 mo performance (in USD):
SHCOMP +150.94%
EEM US +0.51%
Volume 2, Edition 2.1 Wednesday May 27, 2015
Sometimes a simple, yet effective
comparative chart does more for the
investors mind than a 100 page
strategy report with sexy numbers
moving around to justify your long.
Source: Bloomberg, Global Oak Capital Mkts
