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Worst days for China’s stock market may be over

Worst days for China’s stock market may be over

THE SGX FTSE China A50 Index Futures contract is based on the underlying FTSE China A50 Index (up 8.89 per cent year to date), which has outperformed both the broader CSI 300 (up 5.18 per cent) and the Hang Seng Index (up 5.18 per cent) as at market close on Apr 30. The FTSE China A50 Index is a free float market cap-weighted index that tracks the 50 largest A-Share securities. A-shares are onshore securities of companies incorporated in mainland China that trade on the Shanghai or Shenzhen stock exchanges. Notable constituents include domestic companies such as “national liquor” Kweichow Moutai, EV battery giant CATL, and China Merchants bank.

Based on a Fibonacci Retracement drawn from the July 2022 high of 15,015, we are cautiously optimistic about the FTSE China A50 Index Futures, and expect it to close 2024 range bound between the 61.8 per cent retracement level around 13,300 to 13,343 and the 76.4 per cent retracement level around 13,982 to 14,000. We believe that much of the structural issues and headwinds have largely been priced in, and markets are awaiting positive catalysts to be reflected in the economic data.

Bloomberg data indicates that overseas investors contributed about six billion yuan (S$829 million) of onshore equities via trading links with Hong Kong in April. This investment surge was likely driven by improving economic momentum and upbeat corporate earnings.

With the Federal Reserve expected to maintain “higher-for-longer” interest rates, the improved performance of Chinese shares could also be attributed to some rebalancing away from expensive US equities towards Chinese equities, which offer more compelling valuations.

When examining the underlying FTSE China A50 Index’s sector composition, it is evident that the financial and real estate sectors were dominant in 2008, with their combined weight exceeding 50 per cent. However, in recent years, the industry distribution within the A50 Index has become more diversified, with the consumer sector overtaking financials as the largest industry by the end of 2022.

We believe this shift reflects China’s economic transition from “export-driven, high-speed growth” of the past, to a “consumption-driven, high-quality growth”. This is underpinned by a growing middle-income population which is expected to reach 400 million by 2030, driving consumer spending to around US$6.4 trillion annually. Consumer companies like Kweichow Moutai and Wuliangye Yibin typically not available outside of the onshore A-share markets, stand to benefit significantly. Crucially, most A-share companies generate the bulk of their revenue domestically, making the index relatively less sensitive to ongoing geopolitical and trade tensions, as well as global macroeconomic trends.

Furthermore, Chinese fiscal and monetary policies have historically been out of sync with their western counterparts. While the US and EU have been tightening monetary policy to curb inflationary pressures since 2022, China has embarked on an easing path in order to stimulate its economy and fuel domestic demand. This divergence in monetary and fiscal policies has resulted in a low correlation between the FTSE China A50 Index and other developed market indices.

From a technical perspective, the daily chart shows that the contract has been on a steady uptrend since the start of 2024 and is currently approaching the 50 per cent retracement level around 12,800 to 12,827. Some key technical observations supporting our view are:

1. The 50-day moving average crossed above the 200-day moving average in mid-January, indicating a “Golden Cross” which typically serves as a bullish signal.

2. The contract is trading above its 50, and 200-day moving averages.

3. The Moving Average Convergence Divergence (MACD) indicator shows a bullish crossover signal, represented by the MACD line trending above the signal line. The MACD histogram is also in positive territory, indicating bullish momentum.

In summary, China’s A-share market offers excellent diversification benefits at compelling valuations. The US elections remain a key risk factor, but domestic A-shares should offer relatively greater downside protection as they are less prone to regulatory intervention compared to offshore H-shares and US-listed ADRs.

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