China is one of the largest economies in the world and its influence in the global economy is significant, so investors should consider paying attention.
I manage a number of different strategies for clients, including strategies with exposure to international markets. Part of this exposure to international markets can be exposure to Chinese equities, so I pay attention to different aspects of the Chinese equity markets. For any broad markets, I’ll generally keep an eye on both their fundamentals (earnings, valuations, etc.) and their technical indicators (the squiggly lines).
China has had some struggles the last couple of years: COVID, weak rebound from COVID, geopolitics (tariffs, foreign conflicts, etc.), confusing support or lack thereof for their home-based companies, etc. China has been the bad guy. With a relatively weak (or less strong) economy and a ton of uncertainty, the Chinese equity market has experienced a significant selloff since 2021. Both fundamentals and technicals have been weak, with Chinese equities (defined by the FTSE China 50 Index) down over 60% from its 2021 peak.
You can see this weakness in the chart below of an ETF that tracks the FTSE China 50 Index. FYI – I don’t like to put actual investment names on these charts as I’m not recommending or advocating for anything on this site, just sharing insights.
Source: Stockcharts.com. Date: 4/23/24
From a fundamental perspective, there does appear to be some signs of at least stabilization in the Chinese economy. Valuations also appear relatively attractive after the steep selloff the last couple of years. Sometimes less bad news can be good news for Chinese equity markets.
From a purely technical perspective, the ETF proxy for the FTSE China 50 Index is hitting its 200-day moving average (red line in the chart below). If it can break above that level and sustain, it could be a bullish signal for short-term traders and quantitative trading algorithms and this Chinese equity index could continue to move higher.
Source: Stockcharts.com Date: 4/23/24
Technical analysis isn’t some foolproof trading strategy, but I do think it is important to at least pay attention to (notice I didn’t say trade) over shorter periods of time, like now.
Soooo, if Chinese economic fundamentals may be at least bottoming and equity techincals appear to be potentially becoming positive, it remains to be seen whether that will translate to higher Chinese equity markets from here. For my investment strategies that have broad international or dedicated emerging market equity exposure, I’m paying attention here.
For me, since I do allocate to global markets, more often than not, I’ll use diversified, multi-country investment strategies (active managers, passive ETFs, etc.), not single country strategies. In the case of China, in one strategy I manage, I allocated to dedicated Chinese equity exposure. I had been allocating to Chinese equity markets throughout the downturn, and increasingly adding leverage to that position as the selloff deepened. I don’t consider this a long-term position, just a shorter-term tactical position.
My dedicated allocation to Chinese equities is primarily due to the belief that Chinese companies can make money (regardless of the scary Chinese government), broad valuations appear somewhat attractive, and that the market was down over 60%. I don’t think of the Chinese equity markets as high quality investments, but anything that has the fundamentals to potentially go higher after a 60% drawdown, is interesting to me. If the fundamentals are turning less bad and the technincals are potentially turning more positive, there may be enough investors/traders that could push the Chinese equity markets higher at some point.
I have no idea what the Chinese equity market will do from here. Does anyone? Nope. Could the Chinese government do something to shock the markets? Yep. Could the U.S. government announce new heavy tariffs on China? Yep. Could nothing happen and Chinese equities rally? Yep.
You now have a quick glimpse into how I’m currently looking at Chinese equity markets. Time will tell if buying low, adding leverage and being patient will pay off.