The Chinese stock market is booming! Goldman Sachs: Both long funds and hedge funds are buying heavily

In the last trading week before the National Day holiday this year, the Chinese market is booming like never before. Funds are pouring in rapidly, hot sectors are rising one after another, and investors' enthusiasm is at an all-time high. The market seems to be heating up for the upcoming holiday in this way.

As of the time of writing, the Hang Seng China Enterprises Index has risen by 34% year-to-date.

The Hang Seng Index has risen by 27%, outperforming both the S&P 500 Index's 20.3% increase and the Northbound Capital Index's 18.9% increase.

Last Friday, the trading volume on the Hong Kong Stock Exchange soared to $45 billion, hitting a historical high, 23% higher than the previous record and three times the average trading volume since the beginning of the year.

At the same time, the A-share market has seen trading volume exceeding 1 trillion yuan for four consecutive days, with a significant increase in margin trading volume, indicating that the participation of retail investors is continuously increasing.

The key question is, which funds are continuously increasing their positions in the current market, and what sectors and stocks are they mainly buying?

LO focuses on consumer and financial stocks, while HF excels in financial stocks

Fred Yin, Vice President of Goldman Sachs Asia FICC and Equity Trader, pointed out in a blog post on September 30 that the fund flows in the A-share and H-share markets were unusually active last week. The total portfolio trading volume increased by 148% compared to the three-week average, the number of executed clients increased by 41%, and the inflow of funds reached 3.8 times the three-week average, setting a record high for at least a year.

Long-term investors (LO) net bought $560 million, mainly focusing on consumer and financial stocks, while hedge funds (HF) net bought $218 million, with a particularly strong performance in financial stocks.

Both types of investors show a clear "fear of missing out" (FOMO) sentiment, especially as the National Day holiday approaches, with the market heat showing no signs of diminishing. Foreign hedge funds are intensifying their pursuit of highly liquid large-cap Chinese stocks, with a focus on sectors such as liquor and electric vehicle batteries.

In addition, long-term investors are operating in both directions in the Hong Kong internet sector, with foreign funds buying while regional investors are selling.

It is worth noting that initially, Chinese stocks in the US market had a relatively subdued reaction, but they saw a surge of funds flowing in last Friday, with long-term investors, mutual funds, diversified investors, and hedge funds all participating, driving the market's upward trend.

Multiple sectors are rising, especially financials, technology, real estate, and consumer stocks

Yin stated that Northbound capital activities have significantly increased. The $90 billion trading volume last week was the largest single-week trading volume since the market rebound high in May, and funds flowing into China-specific funds are also showing a growth trendLooking at the performance of A-shares, H-shares, and Chinese concept stocks, as of September 27th, financials, TMT (technology, media, and telecommunications), real estate, and consumer stocks have all risen across the board. It is worth noting that the worst-performing stock only dropped by 3%, which is an ADR of a small-cap stock.

The derivatives market is also active. Hedge funds have heavily bought call options on the Hang Seng China Enterprises Index for the year-end, as well as call options structures on the CSI 300 and CSI 1000 indices.

Yin stated that the Volarb Fund focuses on the upside of the Hang Seng China Enterprises Index, buying upside gamma (referring to the rate at which the option delta increases when the underlying asset price rises), and by buying a large amount of at-the-money volatility of the Hang Seng China Enterprises Index, selling downside gamma (referring to the rate at which the option delta decreases when the underlying asset price falls).

Last week, the term structure of H-shares tended to normalize, with forward prices about 3 volatility points higher than the previous months. With the significant rise in the Hong Kong stock market this week, the 1-month term structure underwent a drastic change, with volatility on October 24th soaring by 10 volatility points.

Finally, Goldman Sachs has provided target prices for Chinese stocks in the next 12 months, with the Shanghai and Shenzhen 300 Index having the largest potential upside of 8% to 4000 points, and relatively high EPS growth forecasts for the next two years