19 SMID Granny Shots + 9 Large-caps levered to China recovery. 3 reasons to "respect the upside breakout" in China equities.

VIDEO: We discuss the 19 SMID Granny Shots and 9 large-cap stocks highly correlated to a recovery in China equities and economy.

Please click below to view our Macro Minute (duration: 4:55).

Earlier this week, we spoke about the 3 fundamental drivers into year-end: (i) Fed easing; (ii) China stimulus and (iii) post-election dynamics. We want to focus on the most “incremental” development, which therefore, represents the most positive surprise for markets — the drastically positive actions taken by China’s PBOC and government. Mark Newton, Head of Technical Strategy, early this week advised to “respect the breakout” (and we discussed this at length in our monthly webinar yesterday Wed).

• We want our clients to take advantage of this upside breakout in China equities, most evident in broader China (FXI 0.91% ) and less so in China technology (KWEB 3.55% , yet). There are 3 reasons to respect this “upside” breakout:
  – first, China’s market was hardest hit by Fed’s 2022 “war on inflation”
  – China FXI 0.91%  underperformed S&P 500 by -66%, worst of any country market
  – second, China’s govt and PBOC are taking drastic positive action
  – this is reminiscent of ECB Draghi’s “action at any cost” in 2011 (big risk-on)
  – third, China’s FXI 0.91%  has positive technical momentum, per Newton
• The regional bet on China makes sense for the “cash on the sidelines” view. Investors have been waiting for the Fed to commence an easing cycle before committing capital, particularly those investors outside the US. But we find many hesitant to invest in the US ahead of the outcome of the US Presidential election. China’s equity, therefore, might be perceived as better aligned with taking advantage of Fed easing plus the direct actions taken by China’s government. You get the picture.
• Well known investor, David Tepper, founder of Appaloosa, put it simply.
  – After the Fed cut, his response was “buy everything in China”
  – The CNBC story is here –> LINK
• We list the 20 US industries (GICS level 4) most positively correlated to China below. Most of the groups are not surprising:
  – Commodities: Copper, Specialty Chemicals, etc
  – Cyclicals: Semis and Semicap Eq., Electronic Components, Auto parts, etc
  – Consumer: Personal care, Casinos, Footwear, Leisure Products, etc
  – Full 20 list is below
• The Russell 2000 (small-caps, IWM 0.80% ) also has positive correlation to China and compared to S&P 500 Sectors, is second only to Consumer Discretionary (below). This is whether measured by rolling correlation or beta to China’s FXI 0.91% . This might be counterintuitive since typically S&P 500 (SPY -0.08% ) cos have a large multinational footprint vs small-caps, measured by sales outside the US.
• So the fundamental link of small-caps to China seems somewhat distant, but it is linked:
  – China and EM equities are highly correlated
  – Credit spreads of CCC vs BB (spec. grade vs junk) highly correlated to EM
  – Small-caps highly correlated to quality spread (CCC vs BB)
• In other words, small-caps and EM and quality spreads and China are all “risk on” trades. And China breakout is a further confirmation of risk-on. Hence, this China inflection just positively reinforces our positive stance on small-caps. Sort of convuluted, but logical.

BOTTOM LINE: 19 SMID Granny Shots and 9 Large-cap stocks positively leveraged to China upside

We highlight 19 SMID Granny Shots and 9 Large-cap stocks positively leveraged to an upside move in FXI. The following methodology is used:

• Stock is a SMID Granny Shot and/or Top 40 largest stock held
• Operates within the top 20 GICS most positively correlated to China

The following are the stocks:

SMID Grannies

• Semiconductor Materials & Equipment: ACLS -0.44% , VECO -0.84% , AMKR -2.26% , FORM -1.18% , UCTT -1.13%
• Electronic Equipment & Instruments: NSSC -1.82% , DAKT 2.02%
• Semiconductors: PI -2.52% , CRUS -0.39%
• Application Software: PLTR -0.43% , APP -0.08% , AGYS 0.21% , SPNS 0.38% , MSTR 6.54% , AVPT -0.59%
• Interactive Media & Services: CARG 0.48%
• Movies & Entertainment: SPOT -1.83%
• Industrial Machinery & Supplies & Components: MLI 0.38% , FLS -1.75%

Top Stocks

• Semiconductors: NVDA -2.89% , TSM -4.43% , AVGO -2.58% , AMD -1.77% , INTC -0.21%
• Footwear: NKE 0.78%
• Interactive Media & Services: META 0.07% , GOOGL 1.04%
• Movies & Entertainment: DIS 1.13%

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42 SMID Granny Shot Ideas: We performed our quarterly rebalance on 7/16. Full stock list here -> Click here

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Key incoming data September:

• 9/3 9:45 AM ET: Aug F S&P Global Manufacturing PMI Tame
• 9/3 10:00 AM ET: Aug ISM Manufacturing PMI Tame
• 9/4 8:30 AM ET: Jul Trade Balance Tame
• 9/4 10:00 AM ET: Jul JOLTS Job Openings Tame
• 9/4 10:00 AM ET: Jul F Durable Goods Orders Tame
• 9/4 2:00 PM ET:  Fed Releases Beige Book Tame
• 9/5 8:30 AM ET: 2Q F Non-Farm Productivity Tame
• 9/5 8:30 AM ET: 2Q F Unit Labor Costs Tame
• 9/5 9:45 AM ET: Aug F S&P Global Services PMI Tame
• 9/5 10:00 AM ET: Aug ISM Services PMI Tame
• 9/6 8:30 AM ET: Aug Non-Farm Payrolls Tame
• 9/9 9:00 AM ET: Aug F Manheim Used vehicle index Mixed
• 9/9 11:00 AM ET: Aug NY Fed 1yr Inf Exp Tame
• 9/10 6:00 AM ET: Aug Small Business Optimism Survey Tame
• 9/11 8:30 AM ET: Aug CPI Tame
• 9/12 8:30 AM ET: Aug PPI Tame
• 9/13 10:00 AM ET: Sep P U. Mich. Sentiment and Inflation Expectation Tame
• 9/16 8:30 AM ET: Sep Empire Manufacturing Survey Tame
• 9/17 8:30 AM ET: Aug Retail Sales Data Tame
• 9/17 9:00 AM ET: Sep M Manheim Used vehicle index Tame
• 9/17 10:00 AM ET: Sep NAHB Housing Market Index Tame
• 9/18 2:00 PM ET: Sep FOMC Decision Dovish
• 9/18 4:00 PM ET: Jul Net TIC Flows Tame
• 9/19 8:30 AM ET: Sep Philly Fed Business Outlook Tame
• 9/19 10:00 AM ET: Aug Existing Home Sales Tame
• 9/23 8:30 AM ET: Aug Chicago Fed Nat Activity Index Tame
• 9/23 9:45 AM ET: Sep P S&P Global Manufacturing PMI Tame
• 9/23 9:45 AM ET: Sep P S&P Global Services PMI Tame
• 9/24 9:00 AM ET: Jul S&P CoreLogic CS home price Tame
• 9/24 10:00 AM ET: Sep Conference Board Consumer Confidence Tame
• 9/25 10:00 AM ET: Aug New Home Sales Tame
• 9/26 8:30 AM ET: 2Q T 2024 GDP Tame
• 9/26 10:00 AM ET: Aug P Durable Goods Orders Tame
• 9/27 8:30 AM ET: Aug PCE Deflator
• 9/27 10:00 AM ET: Sep F U. Mich. Sentiment and Inflation Expectation
• 9/30 10:30 AM ET: Sep Dallas Fed Manuf. Activity Survey

Economic Data Performance Tracker 2024:

Economic Data Performance Tracker 2023: