China stock markets holding up

At Tricio we look at charts in order to gauge investment sentiment. When we started Tricio in early 2020 we had an underweight allocation to Chinese equities. This remained the case until May 2024 when our investment committee meeting took the view that we should increase our allocation to ‘neutral’. We had debated this for some time as the low valuations for Chinese equities were attractive, but expectations of efforts by the government to address key issues seemed to be building and this helped to shape our view. So far, so good of course. There was a risk that the Trump win would derail the recovery in equity market sentiment, but here too it is ‘so far, so good’, as the charts below show.

The chart below is the MSCI China index. The index tracks China A, B, H, Red and P chips and foreign listings. It has 580 members and is in USD. The13-week moving average crossed above the 50-week moving average just before summer 2024 and an important falling resistance line (blue) has given way, which suggests a big base is in place.  The big target was above 180 (simple extension) with the red line near 200 marking a potentially really important barrier to overcome for those who are really bullish (old lows, gap). This is a lot closer now than it was before, and bulls may be dreaming about new highs in this cycle. Watch the 13-week moving average near 147 as support ahead of the 50-week moving average near 133.

The chart below is the CSI 300 (biggest shares by market cap on the Shanghai and Shenzhen stock exchanges, in CNY). The 13-week moving average finally crossed above the 50-week moving average in October 2024, confirming the bull trend. Falling line (blue) gave way as well, which is bullish. The early summer 2024 high near 3,700 was regained and the 4,530 area high from the recovery attempt in July 2022 (red line) is seen as the next big barrier to regain and target. A key point for bulls to hold on pullbacks may be the 3,700 area (flat purple line). The 50-week moving average is near here, as is the pullback low from mid-January and the May 2024 high. Sustained losses below this could see losses to 3,200/3,100, but at the moment this does not seem likely. Instead, aiming for a push above 4,530 to set up gains to 5,100/5,300 and even 5,900+ again on a long-term view.

The chart below is the Hang Seng Index, which is a bit of an ‘old school’ way to look at China shares as it is a market cap (free-float adjusted, in HKD) index composed of the biggest 83 shares listed in HK. The 13-week moving average remains above the 50-week moving average which is supportive. The lower falling blue resistance line has given way, which is bullish. The falling blue line from the 2018/2021 peaks is a big upside level to aim for (long-term bulls!) with the flat red line near 27,000 key below this. Support to hold on pullbacks is near 22,500 with further support expected to be found at the 13-week moving average near 21,600. The 50-week moving average near 19,460 which is expected to offer support ahead of the mid-January 18,671 low. Ideally the latter two won’t be tested in this bull cycle.

The chart below is the iShares China Large Cap UCITS ETF (GBP) as a proxy for China funds (others are available!). The ETF tracks the FTSE China 50 Index so it sort of tracks the HSI, but as the chart shows, it is actually a bit different. Falling line resistance gave way in late September 2024, confirming a bullish breakout. The flat red line near 8,900 serves as a big barrier (and target) to watch for. Support to watch will be the 13-week moving average, with bigger support layered at the 50-week moving average (6,620 area) and November 2024 pullback low (6,610). Long-term bulls may be targeting a rally to 11,297 (2021 high) over time.

On the currency side of the sentiment story, a weaker CNY should help a China recovery story (chart below). Inflation is too low and exporters never complain about a softer currency. The 7 area did indeed prove sticky last September/October and the rotation to 7.30 early this year may set the trend for the coming months. A sustained push above this area has been difficult though as USD bulls may come under pressure this year. This is why we look at cross rates as well.

The JPY cross rate (chart below) could hold the key to a weaker CNY this year. The soft JPY took the cross from near Y15 in mid-2020 to over Y22 in 2024. While China and Japan may not compete directly in every economic sector, the soft JPY has been a regional concern for a few years now. A turn in the JPY trend has been slow in coming, but pressure on Y20 is expected in the cross rate. A drop below this will set up a push towards the key Y19/Y18.75 lows from 2022. Looking further out and a drop to the Y17.50 area could be seen longer-term.