Bank of America's latest "Global Equity Volatility Insights" report indicates that despite the Hang Seng China Enterprises Index gaining 20% year-to-date, investor positioning remains relatively light. China's economy is expected to gradually stabilize in 2025, presenting strategic positioning opportunities for the market. Anti-involution reforms represent a key driving force, with the focus shifting from old economy state-owned enterprises in 2015-2016 to supply chain issues in new economy sectors such as new energy and electric vehicles, implemented through a gradual approach. This policy direction provides sustained momentum for related sectors, particularly technology and financial leaders in domestic consumption.
**I. US Stock Volatility: Policy and AI as Key Variables**
In late July, US stock market volatility was reactivated, with the S&P 500 breaking its summer calm and experiencing significant fluctuations for the year. This resulted from multiple overlapping factors: cracks appearing in the labor market, tariff policy volatility, and AI-related trading turbulence.
Bank of America highlights two core themes worth monitoring in the 2025 US stock market. First, policy uncertainty is not an anomaly but the norm, as evidenced by repeated fluctuations in tariff policies. Second, stock fragility is particularly pronounced in AI-related technology stocks, with price movements in tech giants like Meta, Amazon, and Microsoft fully demonstrating this point.
Historical data shows that the VIX typically exhibits seasonal upward trends in the third quarter, further reinforcing the view that US stock volatility will bottom out and recover in 2025. Based on this, Bank of America suggests investors capture volatility bottoms to reduce directional trading costs. For example, using September-expiring VIX 16.5 put options to finance concurrent S&P 500 put spread contracts can provide downside protection during periods of high seasonal volatility while controlling costs - an effective hedging approach in the current US stock market exhibiting historic buy-the-dip characteristics.
**Chart: Labor market cracks emerge, tariff concerns resurface. US stock market volatility was reactivated last week, with S&P 500 10-day realized volatility nearly doubling, and long gamma positions finally paying off**
**II. Eurozone Banking Stocks: Impressive Gains but Hidden Risks**
Year-to-date, Eurozone banking stocks have performed outstandingly, gaining nearly 50%, far exceeding the 8% gain of the Euro Stoxx 50 index, making them primary beneficiaries of capital inflows into European equities. Their excellent performance stems from high cyclicality, elevated market beta coefficients, and sector-positive factors such as M&A and buybacks.
However, Bank of America warns that while Eurozone banking stocks may continue rising, current positioning and price trends already show overbought signals, making them vulnerable against the backdrop of European growth risks. Risk hedging becomes particularly important for investors.
Bank of America recommends December 2025-expiring SX7E ladder put spreads, which provide up to 1,100 basis points more protection than ordinary put spreads at only 30 basis points additional cost, benefiting from steep SX7E put option skew. Additionally, March 2026-expiring SX7E-SX5E cross variance spread contracts represent another good choice, having recently performed steadily or positively. Should market selling intensify SX7E's excessive long positioning and amplify negative beta coefficients, these contracts can profit from SX7E's significant volatility.
**Chart: Among EU peers, European banks (SX7E) have the highest market downside beta coefficient. Despite volatility not being low, SX7E put options still offer attractive downside leverage (above trend line) (1-year downside beta coefficients of various European indices relative to STOXX 600, and their 4-month 50-day put option implied volatility levels)**
**III. Hang Seng China Enterprises Index: Anti-Involution Reforms Bring New Opportunities**
Despite the Hang Seng China Enterprises Index gaining 20% year-to-date, investor positioning remains relatively light. Bank of America believes China's economy is expected to gradually stabilize in 2025, presenting strategic positioning opportunities for the market.
Anti-involution reforms represent a key driving force, with the focus shifting from old economy state-owned enterprises in 2015-2016 to supply chain issues in new economy sectors such as new energy and electric vehicles, implemented through a gradual approach. This policy direction provides sustained momentum for related sectors, particularly technology and financial leaders in domestic consumption.
From a volatility perspective, the Hang Seng China Enterprises Index's volatility pricing is highly attractive, with skew at only -0.9%, near historical lows. Bank of America suggests adopting call ratio strategies that can capture 20% upside potential while effectively managing downside risk. Given the Hang Seng China Enterprises Index's high weighting in internet and financial sectors, it is positioned to become an outstanding performer in China's market, driven by continued southbound capital flows.
**Chart: Due to maximum exposure to internet and financial sectors, the Hang Seng China Enterprises Index (HSCEI) becomes the primary beneficiary of these sectors' gains ((Internet + Finance) sector weightings in CSI 1000, Hang Seng China Enterprises Index, FTSE China A50 Index, and CSI 300)**
**IV. Global Market Volatility Data Analysis and Investment Strategy Summary**
Based on Bank of America's 3-month volatility data, major indices show varied performance. The S&P 500 has 16.2 implied volatility and 12.3 realized volatility; Euro Stoxx 50 has 16.6 implied and 13.6 realized; Nikkei 225 has 18.9 implied and 14.5 realized; Hang Seng China Enterprises Index has 21.7 implied and 18.3 realized volatility.
These data reflect different markets' volatility characteristics and expectation differentials, providing reference for investors developing cross-market strategies. For instance, the Hang Seng China Enterprises Index's high volatility represents both risk and high return opportunities - the key lies in finding appropriate hedging and positioning methods.
Facing the current market environment, Bank of America provides clear strategic recommendations: for US stocks, utilize volatility bottom characteristics through options combinations to reduce hedging costs; for Eurozone banking stocks, remain alert to growth risks and timely deploy hedging tools; for the Hang Seng China Enterprises Index, capitalize on anti-involution reform opportunities using call ratio strategies.
It's important to note that all trading strategies carry risks. Investors should carefully select appropriate investment approaches based on their risk tolerance and market experience. In markets with rising volatility, reasonable asset allocation and risk hedging will be key to achieving steady returns.
Overall, global stock markets are currently at a critical stage of rising volatility, with policy, sector dynamics, and market sentiment interweaving to create both challenges and opportunities. Closely monitoring market changes and following professional institutional research guidance will help investors find direction in complex market environments.
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