When a market is priced for the worst, less bad is enough

Large Chinese companies trade at valuations that assume very little goes right: weak growth, policy risk and little return of capital to shareholders. When a market is priced that way, it does not need good news to rally. It needs news that is less bad than feared.

Low bars move prices

Valuations this depressed reflect heavy selling by foreign investors and a long list of concerns. Many of those concerns are real. But a price already reflecting them reacts sharply to modest improvements, such as steadier growth or a policy step, because so few investors are positioned for any upside.

The trade is not about the economy being strong. It is about it being better than the price implies.

What I'm watching

• Policy announcements on growth and property
• Foreign flows back into the market
• Earnings revisions for the largest companies

Where I stand

Long, on a valuation that leaves room for less bad to be enough. The concerns are real; the price already carries most of them.

What would change my mind

Earnings revisions continuing to fall despite policy support. A cheap market can get cheaper if the earnings keep shrinking underneath it.