Email of the day (2)
Comment of the Day

May 20 2010

Commentary by Eoin Treacy

Email of the day (2)

on China
"Can you offer me an opinion on the market in China, please? The Shanghai A-Share Index has fallen 16.4% since April 15th and is now well below the 200 day moving average. The HK index shows a similar pattern. Is this the result of the authorities taking sensible steps to ensure that their economy will not overheat? Or possibly that the Chinese market is a few months in advance of a similar pull back in Global markets?"

Eoin Treacy's view Thank you for these questions.. China's tightening, aimed at containing speculation in the housing market, has yet to achieve its aim, so further measures to put a lid on property price appreciation appear likely. I believe these tightening measures are a sensible move because the authorities are doing whatever they can to avoid the housing bubble from inflating further. However, the short-term pain is still having a negative effect on stock market sentiment.

The Shanghai A-Share Index hit a medium-term peak in August and has sustained a progression of lower rally highs since. It sank below the 200-day moving average at the end of April and dropped below the psychological 3000 three weeks ago. While somewhat overextended relative to the MA right now, an upward dynamic, sustained for more than a few days would be needed to check scope for further downside while a sustained move back above 3350 would be required to question the consistency of the nine-month downtrend.

The Hong Kong Hang Seng hit a medium-term peak in November and is currently testing the February low in the region of the psychological 20,000. An upward dynamic is required to suggest demand is returning and to question scope for some additional downside. The Hang Seng China Enterprises Index has a similar pattern.

We identified the A-Share market as a leader from November 2008 because it bottomed early and was one of the best performing stock markets in the world through to August 2009. As a timing leader, the trend deterioration experienced since August is a negative, particularly for markets most dependent on Chinese infrastructure growth.

Infrastructure development companies and exporters dependent on growth in the USA and Europe tend to dominate the Chinese stock market. Financials (36.7%), Industrials (16.34%) and Materials (13.7%) at a weighting of more than 66% have an overwhelming influence on the direction of the Index. However, the development of the Chinese consumer economy remains a key policy objective for the central government and remains an important theme.

The S&P/Citic300 Healthcare Index posted a weekly key reversal in late April, in what appears to be a medium-term peak. It has so far held most of its 18-month advance and a sustained move below 3500 would be required to question the consistency of the overall uptrend.

The S&P/Citic300 Information Technology Index posted two weekly key reversals since January, both from the region of 2000. The Index broke down from the five-month range last week and a sustained move back above 1800 would be required to question scope for some further downside.

The underperformance of bellwether sectors such as Healthcare and Information Technology reinforces the argument that China's tightening is affecting every area of the market. This report kindly forwarded by JPMorgan may also be of interest.

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