China might be the best hedge for U.S. stocks.
Key Chinese indexes and stocks are outperforming their U.S. counterparts, and investor sentiment suggests that Asia might even emerge as an economic haven, as America and Europe are still struggling with the Covid-19 pandemic.
Xtrackers Harvest CSI 300 China A-Shares
exchange-traded fund (ticker: ASHR), a proxy for mainland China’s stocks, is up 18% this year, compared with 6% for the
S&P 500 index.
Alibaba Group Holding
(BABA), one of China’s most important companies, are up 36% this year. Alibaba, given its broad scope, might just help investors insulate their portfolios at a time of unusual duress in U.S. history—acting in the role once occupied by fixed income when it was an effective offset to equity weakness.
When President Donald Trump surprisingly ended stimulus negotiations with a Tuesday tweet, U.S. stocks sank. Many Chinese stocks, notably Alibaba, held up.
Hedging U.S. portfolios with Chinese stocks, particularly Alibaba, might seem outlandish, but Susquehanna Investment Group, a top options-trading firm that seeks out noncorrelated U.S. equity investments, has significant China exposure. The secretive trading company owns a huge piece of ByteDance, the parent company of TikTok, that could be worth more than $15 billion. The investment would probably dwarf anything the firm’s partners have ever realized in a long history of extraordinary success.
Alibaba will never protect a portfolio the way traditional hedges, such as S&P 500 options, do, but Alibaba’s options premiums and stock price aren’t as distorted ahead of the bizarre U.S. presidential election. Trading volumes on the
Cboe Volatility Index,
or VIX, are stunningly anemic during the oddest trading year since the 2008-09 financial crisis, suggesting that investors have little faith that VIX derivatives will work as expected.
But adding China exposure, especially Alibaba, to a portfolio offers hedging through diversification.
Alibaba will hold its annual Singles Day event on Nov. 11. For 24 hours, Alibaba will host an online sale and celebration that makes
(AMZN) Prime Day seem like a Rotary Club luncheon. The company will probably report quarterly earnings in early November.
In 2019, Singles Day sales totaled $38 billion, up from $31 billion in the previous year. This year’s event will indicate how much Asian consumers have recovered from the coronavirus. Powerful sales results will intrigue investors who are worried about the sclerotic U.S. and European economies and concerned about political mishandling of the Covid-19 pandemic.
With Alibaba’s stock at $296.50, investors can sell Alibaba’s November $295 put for $18.20 and buy Alibaba’s November $300 call for $17.60. The trade generates a credit of 60 cents. If Alibaba’s stock is at $310 at expiration, the call is worth $10. Should the stock price be below the put strike price at expiration, investors are obligated to buy the stock at the strike price, or to cover the put at a higher prices.
During the past 52 weeks, Alibaba’s stock has ranged from $161.68 to $299. Shares are up 80% over the past year.
Alibaba’s attraction extends beyond hedging and diversification. The stock monetizes the rise of Asia’s middle class, which is one of the world’s greatest economic trends. Alibaba’s scope is so broad that anyone who buys the stock essentially gets the Asian equivalent of a portfolio of companies similar to
Goldman Sachs Group
United Parcel Service
(UPS), and the entertainment studios.
Reports indicate that China’s economy is already recovering from the coronavirus. Goldman has even advised clients that Asia is well positioned compared with other areas because it has contained the virus. The irony is unpleasantly rich.
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