Hedge funds buying stocks exposed to US-China trade on hopes for deal

While some investors remain skeptical of a U.S.-China trade deal, the smart money has started to bet on a resolution to this jarring battle that has dragged on for nearly two years, according to Goldman Sachs.

Hedge funds increased their allocations to companies with big revenue exposure to China during the third quarter, according to Goldman’s latest research looking at 833 hedge funds with $2.1 trillion in equity positions.

The median China-exposed stock had 2.7% of market cap owned by hedge funds at the start of the third quarter, and that position rose to 3.4% at the start of the fourth quarter, according to hedge funds’ latest regulatory filings, Goldman said.

Rising optimism about a trade deal with China has pushed stocks to record highs. The two countries agreed to work on a so-called “phase one” trade agreement in early October, which President Donald Trump had said would include more agriculture buying from China and a pause in tariff escalation. However, the two sides didn’t seem to be on the same page about a rollback in existing tariffs.

Goldman tracks a portfolio of  hedge funds’ top 10 holdings. The most-owned stocks are tech companies with Amazon, Microsoft, Facebook, Alphabet and Alibaba being the top five. Micron Technology also appeared on the list and the chipmaker generates more than 60% revenue from China, one of top 10 companies with the biggest China exposure, according to Goldman.

Last month, Goldman also put out a separate list of stocks with high revenue exposure to greater China. The bank screened Russell 1000 Index member companies using 2018 company filings.

The list is concentrated in chipmakers Qorvo, Qualcomm, Micron Technology, Nvidia, Broadcom and Intel. Casino operators Wynn Resorts and Las Vegas Sands rely heavily on their revenue in China.

Hedge funds’ ramped-up wagers paid off well as companies with big China exposure trounced the broad market since mid-August as the trade tensions started to ease. Goldman’s basket of firms with the highest sales in China outperformed the S&P 500 by 7 percentage points, returning 17% in the past three months, the bank said.

The average equity hedge fund has climbed 10% this year, lagging the S&P 500’s nearly 25% rally in 2019, according to Goldman.

Health care became the biggest sector exposure for hedge funds since 2010, the bank said. Hedge funds started bottom fishing in health-care names in the second quarter after the group took a big hit as political policy ideas such as “Medicare for All” were gaining momentum.