Chinese equities join the party

October 25, 2011

Australian Equities, Global Macro

I was watching the moves in the Shanghai composite index yesterday, or should I say the lack of move and wondering why the ASX 200, the Hang Seng and even the Nikkei were roaring higher but the Shanghai composite was lagging. It really was most intriguing given that the Shanghai market was sitting at its lowest level since July 2010 which means it’s actually the lowest level since April 2009 – just a month after the rally started in markets post the 2009 pessimistic crescendo.

That is a really weak, poor performance in the context of what we in Australia are being told about the saving grace of China and its appetite for Australian rocks and dirt. How can it be that if China is the engine of our prosperity going into the future that its Shanghai share market can be down so low? Even with yesterday’s rally off the low it is down 22.93% since the high in April this year – concerns about China and its growth profile are clearly not just in the realm of the doomsayers.

Indeed the pink line in the chart below is the Hong Kong stock market which has performed even worse than the Shanghai Composite since the start of May. There are genuine concerns about China and its growth profile. Last week’s GDP release of 9.1% was amazingly strong in reality but was lower than market forecasts of 9.5% and fears were building that we would see further deterioration in time toward the low 8% high 7% region which would be quite a slowdown.

 

So Shanghai shares were lagging all day until the release HSBC Flash manufacturing PMI. At 51.1 versus 49.9 last and a low of 49.3 in July has given some hopes that the soft landing is being pulled off. This is potentially good news but without wanting to don the Chicken Little suit I would suggest that what we are seeing in China, Asia more broadly and the developed markets is a recalibration of expectations. Humans are fallible and when the markets fall economic expectations often get dragged down with them. The fact that data has not been as bad as many thought or forecasts is, in and of itself, a good enough reason for a bounce however sustainable or not it ends up being.

To this end my old colleague Richard Franulovich from Westpac this morning put out a piece on their “Surprise Indices”. These indices measure the economic data outcomes versus expectations by the punditry (my explanation not Westpac’s) so to the extent surprises are to the upside then this is a positive against the recent overly pessimistic outlook.Richard wrote,

…While both our US and Eurozone data surprise indices rose last week the recent gains in our US index have been that much more punchy. At 56.1% our US index is now well above its long run average, having risen some 28.3 points from its lows back in early July. By contrast the rise in our European index has been more tepid. At 39% our Eurozone surprise index remains below its long run average, having risen only 13.2 index points from its lows…

…our surprise indices are mean reverting gauges with clearly defined peaks and troughs. Ergo there is relatively more potential for the complexion of the Eurozone data to surprise on the stronger side of expectations than the US data. 

So, the market was surprised by the Chinese data yesterday, they have been surprised by US data recently and they may be surprised by European data going forward (we’ll see). But the key is that Chinese equities bounce yesterday on the back of the stronger than expected PMI data further reinforces this market bounce and could indeed add a little turbo charge of its own. Certainly commodities got a massive lift last night.

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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  1. RBA relaxed on the economy – rate cuts coming but cup day might be an outsider | Lighthouse Securities - October 25, 2011

    […] also printing ok. this is the point I have been making more and more recently and I noted again in this morning’s piece on Chinese equities which was really just about data in the […]

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