[Original Author, by Nigel Ng]
China’s covid situation has been gaining traction in financial markets in recent weeks, and for good reason. China is the source of many global problems, such as supply chain disruptions due to port congestions and semiconductor production and exports. China feeds into 3% of global GDP and into the EPS of many companies in the S&P. If we get globalisation again, the labour market will loosen as there will be less demand for US goods, and wages will start to cool. China solves global macroeconomic problems on many fronts, but their 0 covid policy stands in the way.
The problem with easing restrictions without a policy change is the possibility and large probability of rallies getting faded, as equities are forward-looking enough to know that the easing will be shortlived. However, I do believe we are close to a turning point. It’s not every day that people are willing to speak out publicly against their leader Xi, and I’ve even read pieces about him being replaced! Regarding that.. it would be unambiguously bullish if he was replaced by Premier Li. Though there is a small possibility of his replacement being worse, I wouldn’t count on it. From tuition to gaming to tech to 3 red lines, a lot of China’s problems have been self inflicted. I expect the mother of all rallies if Xi is replaced by Li.
The best solution in my humble opinion is importing Pfizer. However, this would mean going against their 0 covid policy and isn’t great for their ‘face’. Or perhaps one vaccine that they develop internally could be effective and fix the problem. Either way, one of these two would leave to a massive rally in $SMH and hence the Nasdaq. It would also be beneficial for cyclical chinese indices such as A50, as people can now hang out with their friends, drink and be merry. There are many trades that will work, but I pick China A50 and Nasdaq for the reasons explained above.
