China Stock Volatility Defies Global Trend With Cheap Hedging

  • Rally has suppressed volatility, with strategists saying buy
  • Currency market shows similar trend, with cheap protection

Even though gauges of equity volatility have been low across the world, hedging against stock swings hasn’t been that cheap. Except in China.

The Hang Seng China Enterprises Index’s one-month implied volatility -- or bets on fluctuations to come -- is at about the same level as actual price moves over the past 20 trading days, indicating that investors pay virtually no premium to protect against future equity moves.

That’s very different from the trend seen in other markets. In the U.S., the premium is above its annual average, while in Europe, where investors are positioning ahead of the French presidential elections, implied volatility is more than double realized price moves. In other Asian markets including Japan, Korea, India and Australia, the cost of hedging against fluctuations is either in line with its mean or more expensive.

“Market comments -- buy-side, sell-side -- seem much more comfortable with the outlook for China now,” said Tony Hann, the head of equities at London-based Blackfriars Asset Management Ltd. “The risks in China have diminished by the margin, although they are still there. There’s a potential friction point if Trump decides to try to label China as a currency manipulator.”

  • The HSCEI has rallied 9.4 percent this year, beating gains in the MSCI Asia Pacific Index, the S&P 500 Index and the Stoxx Europe 600 Index.
  • As stocks climbed, the one-month implied volatility on the HSCEI slumped 19 percent this year through Friday, while realized moves gained 2 percent. Such low levels of implied volatility are unsustainable, BNP Paribas SA equity and derivative strategist Shuai Chen wrote in a note last week, recommending to position for greater swings.
  • The trend is similar in the currency market, where Credit Agricole CIB strategists Dariusz Kowalczyk and Samsara Wang said now is the time to position for rising volatility. Bets on yuan fluctuations in the coming six months are near their lowest levels since 2015 relative to actual price moves.
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