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China revival?

The move by the Chinese government to abandon their zero-Covid policy is a potential game changer for long-term investors. Gauging the impact of letting Covid spread through the country is difficult as are estimates of the human cost. Time will tell how things work out, and at Tricio we have robust discussions about our underweight allocation to China shares that we have held since starting the company in 2020. One of many tools that we look at are charts, on the view that the market price is a very good gauge of investor sentiment and that markets tend to trend over time. All of the China equity indices have a similar ‘look’, but some are giving slightly different signals.

The chart below is the MSCI China index. This is a daily chart with a 250-day moving average (purple line is the close, green line is the 250-day moving average). Of note is the break below the flat yellow line drawn from the 2020 low. The red line marks potential resistance just ahead of the 250-day moving average. China bulls have seen a big recovery rally over the last few weeks. Sustained gains above the red and yellow lines and the 250-day moving average will do a lot to confirm chart upside potential. Reversal targets would point towards 85 with some potential to challenge 100. Failure to push above this resistance area would be a negative signal, of course.

The weekly chart below is the Hang Seng index, which is probably one of the most familiar indices for foreign investors. The 2020 low (yellow line) was broken here as well. The last few weeks have shown a similar big rally. The red line is under pressure as is the 50-week moving average (purple). A sustained break of these would target the 24,600/25,000 area on a simple swing measure and help establish a bull trend again.

A related index is the weekly chart of the Hang Seng China Enterprises index. The technical set up is very similar as the break below the 2020 low (yellow line) was bearish, but the last few weeks have shown a very sharp bounce. The red line of resistance is under pressure, and the 50-week moving average is at hand. A sustained turn above this area would leave gains to 8,800 attracting on a simple extension measure. Here too, failure to punch above the resistance levels at hand would give a negative signal.

The weekly FTSE China A 50 index below shows that the long term uptrend, marked by the rising yellow line, may be about to resume. This line, and the 2020 low (flat red line) gave way last year, but here too the index has rebounded sharply over the last few weeks. A turn above the rising yellow line would indicate that investor sentiment has shifted. The focus would then be on the 50-week moving average (purple line) with gains to the flat green line above 15,000 expected to attract after that. If the yellow line and 50-week moving average prove difficult to regain, this would be a negative signal.

The weekly chart below is a broader index of shares, CSI 300. The key thing to note here is that the 2020 low did not give way (yellow line). The 50-week moving average is trending in line with the falling yellow line which will be important to break in order to confirm a big turn in investor sentiment.

While the CSI 300 is made up of the biggest 300 shares in the Shanghai and Shenzhen stock exchanges, the Shanghai Composite Index (weekly chart below) has over 2000 members. Here the 2020 low (flat yellow line) was not even approached. The current bounce will need to push above the falling yellow line and 50-week moving average (purple line) in order to confirm a big change in sentiment.

The bottom line for investors is that the last few weeks of sharp stock market gains could build into a bigger rally and resumption of the uptrend. Different indices cover different parts of this market, so choosing the fund that best aligns to the part of the market that the investor wants exposure to is important. (Charts courtesy of Refinitiv)

Gerry Celaya, Chief Strategist

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