Goldman Sachs and a research boutique have constructed a “synthetic” way for investors to bet more cheaply against Chinese stocks.
China’s equity market is one of the biggest in the world, with the main CSI 300 index boasting an overall market capitalisation of $4.5tn. But “shorting”, or taking negative bets on the stocks, is tricky, as the costs and regulations involved are too onerous.
Quant Insight, a London-based research group, has therefore built a basket of about 40 US stocks with Chinese exposure designed to closely mirror the performance of China’s CSI 300 benchmark. Goldman Sachs has added the index to Marquee, its digital platform, which means it can sell clients derivatives known as total return swaps based on the basket.
“It’s a very interesting product,” said Raheel Siddiqui, global macro strategist at Neuberger Berman. “We don’t necessarily want to short China right now, but if we did this is something we could use . . . sometimes it’s easier to play macro themes through equity baskets.”
Mahmood Noorani, the head of Quant Insight, estimates that the cost of borrowing Chinese stocks for short selling can come to more 10 per cent of the equities’ value annually, compared with about 2 per cent by using the custom basket. “Chinese equities are eye-wateringly expensive to short directly,” Mr Noorani said. “This addresses a clear pain point for global investors.”
Investors often want to make more refined bets, while banks can collect fees for building more bespoke investment products. For example, if a hedge fund wants to bet purely on the Spanish economic recovery but avoid the Madrid stock market’s heavy Latin American exposure, they could use synthetic, customised products to do so.
Investor attention on Chinese equities has been on the rise, both because of their increasing importance and integration into global indices and because of the outbreak of the coronavirus, which has weighed heavily on Chinese stocks in recent weeks. The CSI 300 has fallen about 5 per cent since its January peak.
“The virus will probably result in a big hit to China’s economy in the first quarter, and the longer it goes on, the more likely it is to have knock-on effects to the global supply chain,” said Evan Brown, head of multi-asset strategy at UBS Asset Management.
Asset managers have long lobbied for Beijing to make it easier to short domestic stocks, as they see it as a crucial component of a modern, efficient market by allowing investors to also protect their holdings against falls, something known as hedging.
Short selling is legal in China, but Beijing restricted stock lending to only the biggest companies in 2015 after a bout of market turbulence that the authorities said was exacerbated by those placing negative bets. Investors can also short the entire market using futures, but this too can be costly given investors have to “roll” into new futures contracts once the old ones expire.
“There are often structural impediments in capital markets, but this product solves an issue,” said Nicholas Gelber, a managing director at Goldman Sachs’ synthetic products desk. “There are other ways to express a view on China, but it comes down to all-in costs.”
The post Goldman Sachs offers ‘basket’ for China stock bets appeared first on Financial Times.