Buy China Property Call Spreads on Policy Relaxation, Morgan Stanley Says

Investors should buy so-called short-dated call spread collars on China’s property stocks to benefit from a potential easing in the government’s policy tightening measures, according to Morgan Stanley.

The benchmark Shanghai Composite Index has rallied 11 percent since reaching the year’s low on May 7 as slowing growth boosted speculation that regulators will have more room to relax property-market curbs and loan quotas to support the world’s third-largest economy. Property stocks on the Shanghai measure have gained 16 percent since July 1, the most among the five industry groups.

“The policy cycle is turning in China, something which historically has triggered major equity market moves,” said Morgan Stanley analysts led by Viktor Hjort in a report dated yesterday. “The challenge now is capturing major moves while recognizing that the market is no longer in basement-value territory.”

The analysts advised investors to buy an October $105 call while selling a $120 call and $88 put on a Morgan Stanley property basket. They also recommended buying longer duration call spread collars in the nation’s banks to gain “upside” from potential credit growth. A call spread cuts the price of the trade while capping potential profit.

--Chua Kong Ho in Shanghai. Editors: Allen Wan

To contact the reporter on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net

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