From Dec 2013 –
“Top Trade Recommendation Number 4: Long China equities/Short Copper
In today’s Global Markets Daily, we introduce our 4th Top Trade Recommendation for 2014: Long China equities via the HSCEI Index vs. a short copper position via Dec 2014 LME futures. Given that the volatilities of these two assets are similar, we recommend implementing this trade with equally sized positions in the two assets, with an initial target of +c.25% on the combined position, and a stop loss of –c.13% on the combined position.
Our China Equity Strategy team has a year-end target of 13600 for the HSCEI (+c.19% from current levels), and our Commodity Strategy team has an end-2014 copper price forecast of $6,200/mt (-c.13% from current levels, with the Dec 2014 LME future a bit above spot, suggesting some positive carry from a short position here too), making our combined target of +25% a bit more modest than the two separate forecasts would suggest.
This trade highlights several important features in our 2014 set of market views: the expected 2014 acceleration in global growth, the desire to own equity risk, the importance of EM differentiation, the positive market implications of China growth stability, and commodity price downside generated by seemingly abundant supplies.
This long equity/short commodity trade is a way of isolating exposure to China equity risk via a long HSCEI position, which we think is underpriced by the market given our views of stable growth and ongoing rebalancing there, while the copper short hedges out exposure to China’s economic growth, which we think will be stable but not stellar. Short copper, which is typically highly correlated to China growth outcomes and China equities too, has the added advantage of being an asset that we think will likely be facing headwinds of its own over the course of the year, with the short position potentially adding to the positions’ expected returns, and not just a hedge against unanticipated outcomes.”
END RESULT TODAY? STOPPED OUT OF TRADE. LOSS OF 13.5% – THANK YOU ONCE AGAIN MUPPETS…
You can actually script this sh*t.