Profiting From Liquidity Shocks in Equity Markets

Liquidity shocks in financial markets are pervasive and yet often misunderstood by investors. As they are short term, are often self-correcting and regulators have powerful incentives and tools to underwrite stability, having a robust understanding of what causes them and how to recognize when they are occurring can lead to powerful buying opportunities in equity markets.

In this article, we examine the recent history of liquidity shocks in both developed and emerging markets. We then present an in-depth case study of why the recent volatility of the Hong Kong stock exchange and large cap Chinese technology stocks – widely presumed to be about fundamental investor sentiment towards China and Chinese government policy – has all the hallmarks of a classic liquidity crunch. Similar analysis can be applied to ructions in the Chinese property market. In both cases, the buying opportunity stemming from these situations is compelling as short-term liquidity conditions stabilise, and markets are coming to recognise this as well.

The article covers:

• A brief history of modern liquidity shocks in equity markets
• March 2022 Hong Kong Stock Exchange price action: a classic liquidity crunch in disguise?
• The Chinese property market: a model deleveraging?
• The ‘realpolitik’ of sanctions and the outlook for China
• How has Ox Capital responded through this period?

This material has been prepared by Ox Capital Management Pty Ltd (ABN 60 648 887 914 AFSL 533828) (OxCap). It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Any projections are based on assumptions which we believe are reasonable but are subject to change and should not be relied upon. Past performance is not a reliable indicator of future performance. Neither any particular rate of return nor capital invested are guaranteed.