AI Boosts Bullish Bets on Chinese Stocks Japan & Korea
Investors aiming to broaden their portfolios beyond the saturated AI trades in Korea and Japan are progressively turning their attention to Chinese equity derivatives. In recent weeks, trading desks at Barclays Plc and UBS Group AG have observed an uptick in client demand for bullish options and swap contracts linked to China’s CSI indexes. Meanwhile, an increasing number of strategists are advocating for derivative trades to capitalise on potential gains, especially within the mid- and small-cap sectors. Key drivers for Chinese stocks encompass ongoing capital-market reforms that foster a gradual bull market, advancements in self-reliant technology, and an improving earnings outlook across hardware sectors, as noted by BNP Paribas SA and Bank of America Corp. In a recent report, UBS emphasised the CSI 500 as a viable alternative for investors seeking to diversify their exposure to artificial intelligence.
Yet even as optimism gradually returns, traders maintain a cautious stance regarding the nation’s economic outlook and the level of government support. The CSI 1000 Index has rebounded following its most significant monthly decline since 2016 in July, yet it remains 16% lower than its peak in May. Meanwhile, implied volatility – the measure of options prices – has declined toward its one-year average, rendering derivative bets more attractive. “It’s an ideal trade now because people are a bit on edge,” said Lars Naeckter. He recommends call spreads on the CSI 1000. “Rather than piling into cash equities or futures, options make sense, especially when pricing is in your favor. At some point, a catalyst will emerge, and it is often cheaper to be tactically proactive ahead of a move rather than reactive.”
At Barclays, the desk is observing an increase in client interest in call spreads on onshore indexes, with many positioning themselves for a gradual ascent rather than a sudden surge. According to Kaanhari Singh, the bank’s head of Asia Pacific equity-flow derivatives sales, outperformance trades associated with the CSI 300 and CSI 500 indexes present a compelling case when compared to recent historical performance. “We’ve seen growing investor interest in China A-share upside strategies in recent months,” Singh said. “Part of this reflects investors looking to diversify sources of equity returns as questions emerge around valuations and return expectations in some of the market’s most-crowded themes globally.” Meanwhile, UBS’s sales and trading desk observed on Aug. 30 that the most significant weekly derivatives flow in Asia originated from optimistic positions on China’s CSI indexes. There were numerous substantial requests for long swaps focused on the CSI 300 and CSI 500, accompanied by upside option structures.
The increasing significance of technology within Chinese indexes is aiding in the attraction of investors, as the government advocates for the industry’s self-sufficiency, as noted by BNP Paribas. It has ascended to the highest-weighted sector within the CSI 300 Index, and there has been a corresponding increase for the mid- and smaller-cap CSI 500 and CSI 1000 indices. In the United States, on Friday, a trader acquired a substantial quantity of bullish call options on the KraneShares CSI China Internet Fund, speculating that it would revert to price levels observed earlier this year. “China onshore offers a very different exposure to AI due to nation’s own ecosystem. So there is a natural diversification compared to the global AI trade,” said Jason Lui. “Now, having that more well-contained volatility profile also encourages more medium-term asset allocation from both domestic and international institutional investors.”
