'Pain trade': UBS CIO warns of bear trap as Chinese stocks rise

Published Tue, Aug 29 20238:10 PM EDT

Lucy Handley @in/lucy-handley-b2b0a61a/@lucyhandley

The recent rally in Chinese stocks could catch investors out, according to a UBS chief investment officer, who warned of a "pain trade." Although China's economy has slumped in recent months , positive news flow in recent days helped push equities higher. The Chinese government cut stamp duty on stock trading , for example, and U.S. Secretary of Commerce Gina Raimondo arrived in the country on Monday for talks with senior officials . Adrian Zuercher, a chief investment officer at UBS in the Asia-Pacific region, said this could lead to a "bear trap" — when traders open short positions, believing markets will fall, but are forced to close out these positions when markets rise. "Because positioning is so light, every incremental positive news can contribute to this market trade-up. Actually, this looks to me like a bear trap, and it could become a pain trade over the next couple of weeks," he told CNBC's "Capital Connection" Tuesday. He noted that stocks were responding very strongly to positive news flow, even though some of it is not very concrete. "But they're pointing at ... the government working in the right direction. If it's regulatory laws, if it's stimulus, if it's discussions with the U.S. on the trade war side, and all these aspects are actually adding to positive markets." He added that, if the positive news continues, Chinese markets could climb further. "The more news we [get] in this direction, the more markets can actually go back to levels we've seen at the beginning of the year," Zuercher said. Tactical trade However, Zuercher said there could be a "tactical trade" over the coming weeks or months, as hedge funds potentially suffer. "[Stocks] are cheap, particularly if you compare some of the tech names for example in the U.S., which we think really are expensive at this point, and so this is a pair trade. I do think a lot of hedge funds are also probably mispositioned in this area," Zuercher said. "Any move upwards will put more pressure to close maybe some of the underweights we currently see in the positioning in some of the investors." Hedge funds often use a long-short strategy, where they buy stocks in the same sector, betting that one will go up and the other down. — CNBC's Evelyn Cheng and Elliot Smith contributed to this report.