Investing.com – Recent stimulus announcements from China have investors questioning how to position themselves in the event that Beijing launches a more aggressive economic push – a so-called “bazooka” stimulus.
In a note issued on Tuesday, Barclays analysts acknowledged that this is not their base case, but stressed that investors should prepare for such a scenario given its potential to significantly impact global markets.
Despite the recent rally in Chinese stocks, the broader market reaction has been relatively muted, leaving room for opportunities in other asset classes.
Chinese stocks showed some of their biggest moves in history, with the CSI 300 recording an impressive one-week sigma move of +17.6.
“The size of these moves suggests that investors were not prepared for such announcements, and technical factors, such as positioning, may have acted as tailwinds,” Barclays analysts noted.
“Additionally, this also suggests that although there may be additional room for upside, the bulk of the near-term move may be over.”
The rally has been largely limited to Chinese stocks and their proxies, such as European mining companies, but Barclays believes the real impact could come if China unveils a massive fiscal stimulus plan, such as a CNY10 trillion package over two years.
In such a scenario, the effects could spill over into global markets, creating opportunities in non-Chinese assets.
The analysts continued: “It is worth noting that in the ‘bazooka’ scenario, the stimulus is likely to have far-reaching effects on global assets, making upside opportunities on non-Chinese assets more attractive, given less extended moves and cheaper volumes.”
They have identified several strategies to capitalize on this potential, focusing on oil, industrials and US stocks with significant exposure to China.
Among these, analysts have discussed buying US Oil Fund (USO (NYSE:)) bonds contingent on the euro strengthening against the dollar, as oil is particularly sensitive to positive surprises in Chinese demand.
The second opportunity lies in industrials, where Barclays advises buying XLI (industrials) against SPY (call spreads). The Chinese credit cycle has historically been a strong leading indicator of industrial performance, and a major stimulus could give this sector a major boost.
Finally, for investors looking for direct exposure to US-China trade, Barclays screens companies with significant exposure to Chinese sales and attractive volatility profiles.
Among the top candidates are Wynn Resorts (NASDAQ:), Western Digital (NASDAQ:), and Las Vegas Sands (NYSE:), which could see significant gains if the Chinese economy rebounds on the back of stimulus.
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