Trading Places: U.S. vs. China Markets

Explore how U.S. and Chinese markets are shaping global investment strategies in 2025. Eddie Lam offers expert insights on key market movements, stimulus policies, and investor sentiment in this must-hear episode.

Summary – IBKR Podcasts Ep. 223

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Welcome to this week’s podcast. My name is Andrew Wilkinson. For this episode, I’m joined by Eddy Lam, who is the Managing Director for Asia over at Direxion Investments in Hong Kong. Welcome, Eddy. How are you? 

Eddy Lam 

Yeah, very good. Happy New Year, everyone. And thanks for having me, Andrew. 

Andrew Wilkinson 

You’re very welcome. So, Eddy, let’s get straight into this. 

It’s been a mixed start for global stock markets. At the turn of the year, U.S. markets were hovering around all-time highs. How were Chinese benchmarks performing by way of comparison? 

Eddy Lam 

So, the overall equity markets had a rough start to the year and basically underperformed the U.S. and European markets. 

Say, for example, the CSI 300 and MSCI China were down about 3 to 5 percent in U.S. dollar terms. I think the market, you know, generally feels that there are a couple of reasons that contributed to the downside. I mean, first, I think on the 6th or 7th of January, the U.S. Department of Defense added Chinese tech giant Tencent and battery maker CATL to the list of companies associated with the Chinese military. 

So, Tencent was down 7%. I mean, second, there were concerns about what would happen with tariffs on Chinese exports when the new administration came into the White House on the 20th of January. 

I think the third factor is the continued depreciation of the Chinese currency, the CNY, which weakened slightly. So, I think that’s all contributed to the downside, and it’s largely underperformed the broader market. 

Andrew Wilkinson 

Let’s turn the clock back a little bit to September 2024, when the Chinese government seemingly moved decisively to stimulate the consumer economy, the broader economy, and arguably to boost confidence in the stock market. What are some of the views today, Eddy, from local institutions regarding the outlook in 2025 for both China’s market and economy? 

Eddy Lam 

Yeah, so during the Chinese equity rally in September last year, you know, the Hang Seng Index was up 35 percent in less than 20 trading days, and the 14-day RSI rose to 91. Definitely, it was overreacted—overbought. During that rally, we saw that some investors or hedge funds had to cover short positions. 

We also noticed that some strategic allocators who had underweighted China for quite some time had to rebalance their portfolios to match their respective benchmarks. So, those investors had to increase their exposure to China, moving from being underweight to either neutral or slightly overweight. 

We saw substantial net creations in Hong Kong and China ETFs, both those listed in Hong Kong and especially those listed in the U.S. 

As of now, many market participants are still welcoming the prospect of more monetary and fiscal stimulus, though there’s uncertainty about whether these policies will be enough to restore investor confidence in the short term. Most analysts expect to see continued deficit spending and further monetary and fiscal measures in 2025. 

Regarding GDP expectations, the Chinese government would like to set GDP growth at 5% for 2025. However, market participants generally expect the economy to slow down to around 4.5%. 

That said, the consensus on Chinese equity performance may not be that negative. According to Goldman Sachs research, the forward P/E for the CSI 300 is about 11 times, and for MSCI China, it’s about 14 times. Based on decent earnings growth, Goldman Sachs expects both indices could potentially see an upside of around 20% in 2025. 

This potential upside may also be supported by foreign inflows, share buybacks, and higher dividend payouts. 

Andrew Wilkinson 

That sounds a little less expensive than U.S. markets at this point. Can you expand a little on the key corners of the Chinese stock market in index terms? What are the common indices that are most appealing to investors there? 

Eddy Lam 

There are many, but I’ll highlight a few major indices. 

The first one is the CSI 300, which comprises the 300 largest A-shares listed on the Shanghai and Shenzhen Stock Exchanges. Financials, industrials, and communication services make up about 50.7 percent of the index. 

Next is the MSCI China Index, which mainly captures large- and mid-cap companies. These stocks can be A-shares listed in China, H-shares in Hong Kong, red chips, or ADRs. Consumer discretionary, communications, and financials account for around 70 percent of this index, which includes about 581 constituents. 

Another important one is the Hang Seng Index, which consists of 83 constituents that include both Hong Kong and Chinese stocks listed on the Hong Kong Stock Exchange. 

Finally, I’d mention the CSI Overseas China Internet Index. We saw significant inflows into this index during the September rally. It focuses on companies related to internet and technology, and those companies could be listed on exchanges like the Hong Kong Stock Exchange, NASDAQ, or the New York Stock Exchange. 

These are some of the more popular indices among both institutional and retail investors. 

Andrew Wilkinson 

What markets or products do you see Asian investors trading the most? 

Eddy Lam 

In Asia, we find that investors remain relatively positive on U.S. equities, largely due to solid earnings growth, AI developments, and strong economic numbers. 

In terms of ETFs, we see that investors generally favor income-themed and enhanced-return strategies. In the last two years, capital protection strategies have also gained popularity. Additionally, we’ve observed more retail investor participation. Technical traders are using leveraged and inverse ETFs, especially in sectors like semiconductors, U.S. Treasuries, and single-stock ETFs. 

Andrew Wilkinson 

What about appetite outside the region? Here in the United States, we see that investors from all over the world appreciate the liquidity of U.S. markets. Do you see much appetite from Asian investors for markets outside the region? If so, where? 

Eddy Lam 

Yes, we see a lot of Asian investors favoring U.S. markets, given their liquidity, breadth, and depth. Many domestic markets, like those in Korea, Taiwan, and Hong Kong, have underperformed the U.S. market for several years. 

As a result, investors have increased their allocation to U.S. markets. The trend seems to be holding steady, and there’s still a lot of confidence in the U.S. economy and stock performance for the coming years. 

Andrew Wilkinson 

Yeah, that’s been a common theme we’ve heard from several people. Whenever we’ve seen Chinese equities snap back from being underinvested in, the moves have been pretty violent, haven’t they? 

Eddy Lam 

Yes. According to research, the underweight positioning has improved somewhat. Some investors don’t want to be too underweight on China because, when the market rebounds, it can do so very quickly and sharply. 

We’ve also noticed that many investors are closely watching stimulus policies. They believe it will take time to fully restore investor confidence. Tariffs are definitely a key factor as well. But overall, there is renewed interest in the Chinese market, with investors looking for the right time to re-enter. 

Andrew Wilkinson 

Very good. Eddy Lam, Managing Director for Asia in Hong Kong with Direxion, thank you very much for being my guest today. 

Eddy Lam 

Thank you, Andrew. 

Andrew Wilkinson 

And to our listeners, please don’t forget to subscribe wherever you download your podcasts. Thanks, everybody. Bye for now. 

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