Securities-backed financing is an effective way to tap into oversold equity opportunities

Oversold markets look poised for rebounds after sharp declines, potentially offering a timely opportunity for investors. In the current climate of tight liquidity, securities-backed financing from EquitiesFirst presents a viable and cost-effective avenue for investors wishing to pursue it.

Two possible opportunities worth highlighting are US and China equities. While a growing chorus of commentators are opining that the US market has entered oversold territory,^[1] the sell-off has been particularly severe in China, according to Bloomberg market analysts.^[2] Securities-backed financing offers investors a powerful way to increase exposure to these markets without sacrificing upside potential from their existing portfolios.

Accessing alternative funding to catch the market rebound

Technical charts show that stocks in Hong Kong and China could be ripe for a reversal after a protracted sell-off.^[3] In any case, there might not be much downside. While investor sentiment towards the two markets remains bearish, given that both have recorded their steepest declines since the 2008 financial crisis, the historical trend line suggests much further declines are unlikely.^[4]

To be sure, there is broad consensus that China’s economic growth rates going forward will moderate from the impressive levels witnessed over the past four decades. Still, the China market will continue to offer pockets of opportunities, claims legendary emerging markets investor Mark Mobius.^[5]

Meanwhile, Pictet Wealth Management believes that China looks attractive given its low equity valuations and expectations that its economy will reaccelerate compared to India.^[6] With Indian stocks having racked up gains in every single year from 2016 to 2022, Hugues Rialan, Pictet’s Chief Investment Officer for Asia, argues they are now looking expensive.

Diverging fortunes of the emerging stock market giants

Indeed, in contrast to China, a number of analysts, including those at CLSA, believe the India market could be overbought and due for a correction.^[7] Although the brokerage is not overly concerned about the prospects for Indian equities, it still has several important concerns including exceedingly rich valuations, margin erosion depleting relative profitability and consensus earnings growth expectations continuing to be too optimistic in relation to the track record to date.^[8]

Although the competition to attract emerging market investment flows is “not a zero-sum game,” stresses Matthews Asia portfolio manager Michael Oh, comparisons between the two Asian giants are inevitable and becoming more frequent.^[9]

While Indian equities are clearly having their moment in the sun, China remains by far the bigger market. India’s US$3.4 trillion economy is one-fifth the size of China’s, and its $3.9 trillion stock market is about one-third the size.^[10]

Even though India’s GDP growth is tipped to outstrip that of China over the next few years, the difference will not be nearly enough to close that gap by very much. So, although some investors may rotate between the two markets, the rotation between sectors within China could be a more significant trend.

China’s evolving equity growth drivers

Analysts from the likes of Goldman Sachs and JP Morgan point out that as China’s economy evolves, so too will the opportunities within it. ^[11] China’s next growth drivers are expected to be domestic consumption, renewable energy and advanced manufacturing. These are areas the government is keen to promote, and which are highlighted in its new stimulus plan.^[12]

Given that opportunities are likely to continue evolving, investors would benefit from a flexible source of alternative capital. Securities-backed financing from EquitiesFirst provides just that.

Economists polled by Bloomberg project the Chinese economy will grow 4.5% in 2024 after expanding 5% this year. But areas like renewable energy have clear potential for outsized growth. Apart from China’s ambitious net-zero target, energy security concerns will motivate its government to continue scaling up installed solar and wind energy capacity to reduce the country’s reliance on imported oil and gas.

China is also intent on dominating the clean technologies of the future, having already established a clear lead in many of their supply chains. China produces about 90% of the world’s rare earth elements, at least 80% of all the stages of solar panels and 60% of wind turbines and electric-car batteries. In some of the materials used in batteries and more niche products, China’s market share is close to 100 per cent.^[13]

But despite the strong positions of China’s clean technology suppliers in global markets, their stocks have fallen in line with the overall market sell-off. If the market does rebound, these could well perform considerably better than the average.

Securities-backed financing is ideal for tapping oversold opportunities

Investors seeking to purchase equities they believe might be oversold may wish to raise the necessary capital using securities-backed financing. With liquidity now hard to come by and banks reluctant to lend, it offers a low-cost, flexible way for investors to access funding to gain exposure to new opportunities while maintaining the upside potential from their underlying holdings.

Since all loans are secured by equities or crypto holdings provided as collateral, EquitiesFirst is able to extend credit more readily than traditional lenders and at better terms – including higher loan-to-value ratios, reasonable margin call thresholds, and competitive interest rates.

EquitiesFirst has a 20-year track record in providing this form of ‘progressive capital.’ It takes insight and conviction to correctly identify oversold opportunities and beat the crowd in pursuing investments at attractive valuations. And it takes a progressive solution to bring them within reach.

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[1] https://fortune.com/2023/10/20/sp-500-is-primed-for-a-14-rally-this-year-because-stocks-are-extremely-oversold-piper-sandler-says/

[2] https://www.bnnbloomberg.ca/oversold-china-stocks-poised-for-rebound-technical-charts-show-1.1836764

[3] https://www.bloomberg.com/news/articles/2022-10-25/oversold-china-stocks-poised-for-rebound-technical-charts-show

[4] https://www.bloomberg.com/news/articles/2022-10-25/oversold-china-stocks-poised-for-rebound-technical-charts-show

[5] https://www.bloomberg.com/news/articles/2023-08-07/china-or-india-how-to-invest-in-the-coming-asia-boom?srnd=markets-magazine-v2

[6] https://www.bloomberg.com/news/articles/2023-08-07/china-or-india-how-to-invest-in-the-coming-asia-boom?srnd=markets-magazine-v2

[7] https://www.businesstoday.in/markets/market-commentary/story/sensex-nifty-hit-record-highs-clsa-says-market-14-overbought-what-citi-others-say-387402-2023-06-28

[8] https://www.businesstoday.in/markets/market-commentary/story/sensex-nifty-hit-record-highs-clsa-says-market-14-overbought-what-citi-others-say-387402-2023-06-28

[9] https://www.bloomberg.com/news/articles/2023-08-07/china-or-india-how-to-invest-in-the-coming-asia-boom?srnd=markets-magazine-v2

[10] https://www.reuters.com/breakingviews/global-banks-india-could-soon-be-worth-it-2023-11-07/#:~:text=Of%20course%2C%20India%20only%20looks,about%20one%2Dthird%20the%20size.

[11] https://www.bloomberg.com/news/articles/2023-08-07/china-or-india-how-to-invest-in-the-coming-asia-boom?srnd=markets-magazine-v2

[12] https://www.bloomberg.com/news/articles/2023-10-25/china-stimulus-plan-to-make-big-impact-ex-pboc-official-says

[13] https://www.ft.com/content/6d2ed4d3-c6d3-4dbd-8566-3b0df9e9c5c6