Bearish on the Chinese economy as the virus spreads?

As the Chinese coronavirus endemic gathers momentum, gloom and doom prognostications on China and its economy are quickly out of the gate.

Markets are in meltdown mode. Predictably, investors are drawing comparisons with the previous SARS outbreak and its effect on China. Media images of Beijing in a lockdown mode with empty roads and malls are just adding to reports of the Chinese military cordoning off Wuhan, the epicenter of the outbreak. Country after country is sending in planes to evacuate their citizens out of the danger zones in China.

It’s a no-brainer that the Chinese economy, hence Chinese stocks, will take a hit from the coronavirus. And certain ETF’s reflected investors’ sentiments. (ETFtrends)

Inverse Chinese ETF’s zoom

Inverse Chinese ETF’s, or ETF’s that rise in value if the underlying asset falls, have turned bullish. That confirms that investors have turned bearish, at least in the short-term, on Chinese stocks.

Consider the following ETF’s which shot up Thursday on heavy volumes (an additional confirmation of bearishness):

• ProShares Short FTSEChina 50 (NYSEArca: YXI) : +1.5%
• ProShares UltraShort FTSE China 50 (NYSEArca: FXP) : +2.2%
• Direxion Daily FTSE China Bear 3X Shares (NYSEArca: YANG): +3.9%
• Direxion Daily CSI 300 China A Share Bear 1x Shares (NYSEArca: CHAD): +1.8%

Note that some of the above ETF’s have inbuilt leverage. For instance, a “Short” or 1X ETF will replicate the inverse (-100%) of the daily performance of the underlying asset or index. However, an “Ultrashort” ETF will replicate the double of the daily inverse (-200%) of the daily performance of the underlying asset or index. And, a 3X inverse ETF will deliver (-300%).

Analysts views on China

Many people are shrugging it off, saying the Chinese will overcome the epidemic as they did in the past.

However, some analysts are not so sanguine.

“What we’re seeing reflected in things like bond yields and oil prices is the very real possibility that, at least in the short term, we see a hit to economic growth,” said Liz Ann Sonders, chief investment strategist at Charles Schwab, on Bloomberg TV. “A rerating of growth in the very near term, at least just specific to coronavirus, is justifiable.”

Is this a pandemic?

“The bad news is that the worst has yet to come, as the number of new infections is still on the rise,” warned Larry Hu, economist at Macquarie Capital.

“Wait till after Chinese New Year … we will know the degree, the speed and the breadth of infections by this virus, and get a much clearer idea on mortality,” said David Roche of Independent Strategy.

Meanwhile, if you’re convinced that it is going to be different this time, and things are likely to get worse, buy yourself an inverse Chinese ETF.

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