Mini HSI Futures: Position for tactical rally on monetary easing

11 Jan 2024

By Danish Lim, Investment Analyst for Phillip Nova

 

 

We hold a favorable view of the Mini HSI Index Futures contract in the short-term on likely policy stimulus; but we prefer to wait out any short-term corrections before positioning for a near-term tactical rally. Due to medium-term structural concerns and still-weak confidence among businesses and consumers, it will be a while before the market trades on economic and corporate fundamentals.

Key market drivers for 2024 include China’s growth trajectory (influenced by government stimulus, property sector woes, deflation risks), US interest rate trajectory, and geopolitics. From a valuation perspective, the Hang Seng is trading at a Last 12 Mths P/E ratio of 8.7x, well below its 5Yr average of 11.3x. This is in contrast to a P/E ratio of 22.5x for the S&P 500.

Investors from mainland China have been a net buyer of HK stocks for the past 4 sessions, with data showing investors bought a net HKD 2.15bn of HK shares thru the stock connect program on 4th January. We expect to see the PBOC delivering RRR and/or interest rate cuts in 2024. The PBOC recently weakened its yuan fixing by the most in over 6 months, signalling that policymakers may be shifting their focus from stabilizing the yuan to more monetary easing in a bid to revive growth.

Expressing Our View
We favour the hypothetical trade setup below in order to express our view.

Long Mini Hang Seng Index Futures:
The contract saw a bearish reversal from around the 17,050 level (orange line), which was a vital support level that was broken in early December, but now serves as a key support-turned-resistance level.

With a Fibonacci Retracement drawn from the December low on the 4-hourly chart, we prefer waiting out any short-term correction and taking entry near the 0.618 retracement level at 16,465. We set our target level at 17,050, and stop loss at the 0.786 retracement level around 16,250. This setup delivers a reward: risk ratio of 2.76x.

• Entry Level: 16,465
• Target Level: 17,050
• Stop Loss Level: 16, 250
• Profit at Target: 585 ticks x HKD 10
• Loss at Stop: 215 ticks x HKD 10
• Reward: Risk Ratio: 2.76x

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An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

  • ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
  • ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
  • An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

  • Trade in both the bull and the bear markets
    The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
  • Smaller barrier to entry
    Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
  • No expiration date or risk of delivery
    Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

 

Benefits of using Phillip MT5:

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