How to handle a potential Chinese ‘bazooka’ by Investing.com

Investing.com — China’s recent stimulus announcements have left investors wondering how to position themselves should Beijing unleash a more aggressive economic push — a so-called “bazooka” stimulus.

In a note on Tuesday, Barclays analysts acknowledge that this is not their base case, but stress that investors should prepare for such a scenario because of its potential to have a significant impact on global markets.

Despite the recent rally in Chinese stocks, the broader market reaction has been relatively muted, leaving room for opportunities in other asset classes.

Chinese stocks have shown some of the biggest moves in history, with the CSI 300 posting an amazing one-week sigma move of +17.6.

“The magnitude of these moves suggests that investors were unprepared for such announcements and also that technicals such as positioning may have acted as a tailwind,” Barclays analysts noted.

“Furthermore, it also indicates that while there may be more room for growth, most of the short-term movement may be over.”

The rally has largely been limited to Chinese stocks and their proxies, such as European miners, but Barclays believes the real impact could come if China unveils a massive fiscal stimulus plan, such as a 10 trillion CNY for two years.

In such a scenario, the effects could spill over into global markets, creating opportunities in non-Chinese assets.

“Notably, in a bazooka scenario, stimulus would likely have broader effects on global assets, making upside opportunities for non-Chinese assets more attractive given less extensive moves and cheaper volume,” they continued the analysts.

They outlined several strategies to capitalize on this potential, focusing on oil, industrials and US stocks with high exposure to China.

Among them, analysts discussed buying calls on the USO Oil Fund ( USO (NYSE: ) ), conditioned by a stronger euro against the dollar, as oil is particularly sensitive to positive surprises in Chinese demand.

A second opportunity lies in industrials, where Barclays advises buying hybrid call spreads XLI (Industrials) vs. SPY (). The Chinese credit cycle has historically been a strong indicator of the performance of industries, and a major stimulus could give the sector a significant boost.

Finally, for investors seeking direct exposure to US-China trade, Barclays looks at companies with high exposure to China sales and attractive volatility profiles.

Top contenders include Wynn Resorts (NASDAQ: ), Western Digital (NASDAQ: ) and Las Vegas Sands (NYSE: ), which could post significant gains if China’s economy recovers on the back of stimulus.