Most stock markets are still dithering around levels which fit the scenario whereupon sharp falls lie just ahead. Don’t panic, just be prepared.
In the meantime, following our deep-ish dive on the outlook for gold last week, today it is the turn of China, which is the subject of the major breaking news in recent days.
Long time readers know our central case for China, that it is at or towards the end of a bear market which has persisted for 17 years – the technical analysis explaining this is set out below, but first the latest out of China.
The US rate cuts last week were cheered the loudest in Asia, particularly China, but we cautioned:
“It is far from clear that the Chinese equity markets might at last have hit bottom, as a cut in their interest rates is mere window dressing when more fundamental government action is needed. One to keep an eye on in coming weeks.”
There was indeed “more fundamental government action” on Tuesday 24th: not just lower rates, but also direct support for their very cheap stock market as well as its ailing property sector. The Chinese stock market indices instantly took off, and the rest of Asia also has a new bounce in its stride.
The question isn’t whether this raft of measures “announced with uncharacteristic fanfare” will alone drive a new multi-year bull market in China. It can be phrased more simply. Is this “aggressive stimulus blitz” (FT) at least sufficient to put a floor under the Chinese stock market which has endured a 17-year bear market?
You are often told that bear markets end with panic selling, and often times that is the case. But they also end with utter boredom, which is what happens at the end of a 17-year bear market. China is the world's second biggest economy, it is a world leader in technologies that will be key drivers of global growth for decades to come, but investors lost interest. This indifference is despite China being ridiculously cheap – using a simple price earnings ratio, China is 50% cheaper than the US, and more than 60% cheaper than India.
This insouciance is institutionalised. On Wednesday 24th this was confirmed in spades by John Authers, who tells us that “there has been a serious shift in confidence toward China over the last three months”. Surveyed global investors don’t just think China’s growth is faltering – they also don’t think it matters for the rest of the world. Hmmm.
On the same day, and in the same vein, Ambrose Eavans-Pritchard (Telegraph) wrote a withering assessment of the announcement out of China the previous day, as “they fall far short of kickstarting China’s struggling economy”. Yet he gave the game away in his final paragraph:
“It is not impossible that Xi will listen seriously to those now calling for a drastic change of course… Should he do so, it will change the global economic landscape overnight and set asset markets on fire”.
I find it strange that so many commentators personalise this “Xi this… Xi that”, and also assume that they have some insight which the Chinese leadership does not. The issues are well understood in China, and will have been discussed in great detail for months…
…and based on these deliberations there were even more positive vibes reported on Thursday 26th following a meeting by the 24-man Politburo, the equivalent of the UK governments Cabinet. The Chinese state news agency reported:
“Some new situations and problems have emerged in the current running of the economy. We must view the current economic situation comprehensively, objectively and calmly, face difficulties squarely, and strengthen confidence.”
Translated that means we aren’t stupid, we get that urgent action is needed, we are in control, and we will act decisively but not in a panic.
Then last night there was more action out of China, with a cut in another interest rate (the rate paid by the central bank to commercial lenders), and the release of $140bn by cutting the amounts banks need to hold in reserve.
It is confidence within China that has been the key missing ingredient. Time will tell if the comprehensive package this week is enough to encourage people to borrow the huge sums which are now available. Other obvious and desperately needed reforms have not been announced, at least not yet, for example of the Hukou system. Some analysts believe that eventually cash injections to households will be required, Covid-style.
But it is absolutely clear that this bazooka lit a fire under the domestic Chinese stock market, the A shares. The volume of domestic investors buying their own stock markets was such that it triggered a few problems on the Shanghai Stock Exchange.
Some say to be a great investor you need to be a contrarian, and do what everyone else isn’t. This is silly, and is an assured way to lose vast sums of money. Most of the time you must be following the positive trends. The only exception is at major turning points in markets…
At the end of a 17-year bear market the evidence of an utter lack of interest will be everywhere, as highlighted above. You will see domestic buyers getting on board, while foreign investors continue to stroke their chins, increasingly struggling to justify the negative editorial of last week, last month, last year.
If our technical analysis is correct, the upside is huge. But the volatility, particularly in the early stages of this bull market, if indeed that is what it is, will also be huge. Let me explain both elements.
Since 2007 the Chinese stock market has formed a sideways triangle, which gets narrower and narrower year by year. Eventually the index has to break out of this triangle, and if our analysis is correct, it should break upwards. The guide is that the upside is equivalent to the deepest point of the triangle, which is in excess of 400%, a considerable gain which would unfold over years.
But in the early stage of the new bull market, you do need to take care. The first wave upwards can be sharp, with substantial gains. But doubts remain, and so the early bird investors will be quick to take profits e.g. the Hang Seng (the H Shares index) went up more than 50% in 3 months from November 2022, and most of that was lost in the following 11 months.
So it might make sense to trade this initial uptrend, and keep moving up your stop-loss as gains unfold. When you are taken out (you will be), look out for a reasonably sharp correction, and an opportunity to get back on board for the most exciting bit – the wave 3. We explained the waves and their different personalities, with some pictures, in this blog.
So domestic investors are buying China, as are some global contrarian investors. I can see resistance for the first wave at about 4200 on the CSI 300 index, which is about 18% above today’s level.
Over the last week, the CSI 300 is up 15%, Japan up 7%, and similarly with diversified Asian indices. European indices (helped by rate cut hopes) are ahead around 3%, similarly India. UK and US have gained about 1%, at best. Mining and metals funds benefitted from China positivity, to the tune of 8%, and gold made another 3% of progress.
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