MACRO

A good start for the Chinese market

Lee Hong Wei

Singapore Sales Trader

US protectionism and President Trump’s ‘America First’ policy have rattled world markets with global growth slowing down in response to the high-profile shots fired from Washington in the service of “fixing China’s longstanding unfair trade practices”.

China's growth and economic conditions have felt the pressure with the recent weak set of back-to-back PPI readings (0.9% for December) and 0.1% for January) falling short of forecasts and underscoring the problem. The reading hit the lowest level seen since September 2016 and is likely to affect both top line corporate profitability and global inflation. Export numbers for China have also come under pressure, coming in at -4.4%, year-on-year, compared to double digit growth in Q2. The forward-looking Chinese equity market also retreated massively in 2018, with certain benchmarks losing more than 20% of their value.

Source: Bloomberg – Both CPI and PPI experiences slowdown since Q4 last year

Feeling the heat from the US trade war, China has responded aggressively with three Required Reserve Ratio cuts, flooding the market with liquidity. With the impact of tariffs yet to be fully absorbed, the People’s Bank of China is also expected to take additional measures to support the economy. Beyond this, other measures such as rapid issuance of local government bonds, encouraging banks to increase lending to SMEs, and the China Securities Regulatory Commission’s supporting struggling equity markets are also in the mix.

The chart below shows the monthly long S%P 500/short Shanghai Composite for the last three years. Unsurprisingly, the strategy did very well in 2018 as trade woes between US and China deepened. The spread widened as tariffs were applied and as US growth hit a potential peak, potentially aided by Trump’s corporate tax cuts.

The strategy netted a return of 22% in 2018, compared to a 24.7% loss in Shanghai and a 6.5% loss in the S&P 500. How long this outperformance can last, however, remains the key question. Progress has been made in the trade talks since the start of this year and a conciliatory tone has emerged on both the US and Chinese sides in what some allege is an attempt to shore up a shaky financial market. After all, the S&P 500 was down by as much as 9.2% in December, its biggest monthly loss since 2009. The Shanghai-Shenzhen CSI 300 Index has been the best performing market by far this year, gaining as much as 15% year-to-date.

Source: Saxo, Bloomberg – Monthly return of Long S&P 500 and Short Shanghai Composite Returns

With the March 1 deadline looming, Northbound fund flows as well as the Vix index point to the degree of complacency present, with the latter now hovering below 15 after retreating from its high of 36 in December.

Astonishingly, the S&P 500 is now only 5.6% away from its September 2018 all-time high after posting a huge, 18% rebound from its low in December; the Chinese market remains 30% from its all-time high.

Compared to the US benchmarks, downside risk for Chinese equities seem to be much lower as the S&P 500 traded almost 10% down from its October low in December while Chinese benchmarks such as Shanghai Shenzhen only traded 2.5% lower comparing the same time periods. In our view, Chinese equities look relatively attractive at present in both technical and valuation terms.

Source: Bloomberg – Northbound flows continue to be solid, with only 2 days of Northbound negative inflow seen this year
Source : Bloomberg – S&P 500 plunged so much from its low in October
Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.