China: Now what?
China: Now what?
After rallying >30% from the troughs in late January to the highs in mid May, MSCI China has retraced 10% in the past 6 weeks. The weakness in A shares has also been noticeable, especially in small/mid caps where index proxies such as CSI1000 and CSI2000 have lost around 20% YTD. What is next in the China trade? Chart shows the CSI 300, the big downtrend and the 200 day moving average.
Source: Refinitiv
Just profit taking, a minor correction or is it "all over"...?
"Empirically, in the 23 episodes in the past 20 years where MSCI China rallied more than 20%, the market almost in all cases (22 out of 23) experienced at least a 5% pullback after entering a technical bull phase. These corrections averaged 12% by magnitude, and 32 days in duration, although their subsequent return trajectory varied significantly post the initial retreat, with earnings accrual/upgrades typically taking over from valuation to drive further gains when these upswings transitioned into a fundamental-led cycle." (GS)
Source: Refinitiv
Slightly below
The prevailing market recovery is slightly below other strong rallies historically.
Source: FactSet
Earnings recovery needed
Earnings accrual and/or upgrades are necessary to extend the recovery.
Source: FactSet
All eyes are on the July policy meetings
July will be a hectic month for China policy watchers: The Third Plenum of the Chinese Communist Party is scheduled for July 15 to 18, followed by the economically-focused Politburo meeting in July, usually convened end of the month.
Politburo push
Markets traded well immediately post the past-4 economically-focused Politburo meetings.
Source: FactSet
Counting keyword
The policy emphasis on growth has strengthened, while the focus on ideological priorities appears to have moderated in recent months.
Source: Factiva
Cautious positioning
Investor positioning remains at the low-end of the historical ranges.
Source: EPFR / GS Prime
China 1 sigma cheap
12-month forward P/E for MSCI China, past 10 years.
Source: FactSet
Fading China
Many EM reduce links to China.
