• 511 days Will The ECB Continue To Hike Rates?
  • 512 days Forbes: Aramco Remains Largest Company In The Middle East
  • 513 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 913 days Could Crypto Overtake Traditional Investment?
  • 918 days Americans Still Quitting Jobs At Record Pace
  • 920 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 923 days Is The Dollar Too Strong?
  • 923 days Big Tech Disappoints Investors on Earnings Calls
  • 924 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 926 days China Is Quietly Trying To Distance Itself From Russia
  • 926 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 930 days Crypto Investors Won Big In 2021
  • 930 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 931 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 933 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 934 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 937 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 938 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 938 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 940 days Are NFTs About To Take Over Gaming?
  1. Home
  2. Markets
  3. Other

The Great Titration Continues

The Great Titration Continues

Over the past two weeks, China's Shanghai Composite index shattered overhead resistance (see Here) - tacking on another ~10% to its already prodigious returns for 2015. To date, the SSEC is up roughly 85% over the past year, with the vast majority of gains realized since last July. To put it mildly, China's equity markets have been set on fire, trouncing world indexes that has seen the S&P 500 tread water over the past four months.

Consequently, the SSEC's steep trajectory has resulted in growing skepticism by those who have either a) looked for a crash in China to no avail over the past several years or b) simply expect that what goes up must come down. Our general perspective, however, remains that the breakout in China is real - and there's more than just ephemeral speculative spirits behind the move.

The fine folks at BCA Research had a nice piece up on China yesterday (see Here), which hit on a number of the key factors greatly impacted by the significant move in their equity markets over the past year. We highlighted the main points below with emphasis on their parting statement.


China retail Sales versus Cosumer Confidence
  • Rising stock prices increase household wealth and boost confidence, which in turn supports consumer demand.
  • The numbers of investor accounts in the Shanghai Stock Exchange recently hit 125 million, almost triple the level in 2007 during the previous equity mania.
  • This amounts to over 16% of the urban population, compared with a mere 6% eight years ago.
  • Consumer confidence has surged to its highest level in recent years, a highly unusual development considering the weak growth environment.
  • Rising consumer confidence will eventually benefit retail sales.

From policymakers' perspective, however, a much more important consideration is the funding mechanism of the stock market. - The Feedback Loop of a Bull Market - BCA Research Blog


China A-Shares New Accounts

From our perspective, the recent surge in investor participation in China should be received with less speculative skepticism and more as a positive quantifier that the potential for the economy can transition from being driven solely by exports and infrastructure construction - to a greater capacity for domestic growth and consumption.

With their equity markets acting as a wealth transmission mechanism to a growing percentage of the population, the great titration from communism to capitalism continues. While we wouldn't be surprised to see a modest short-term retracement decline, considering the outcome and proportions of the historic breakout pattern - as well as the discrete traction and growing confidence from President Xi Jinping's major reform initiatives, we believe the potential in Chinese equities remains substantial.

1980-1983 SPX versus 2008-2015 Shanghai Composite Weekly Chart
Larger Image

1980-1984 SPX versus  Shanghai Composite Today Chart
Larger Image

1982-1983 SPX versus 2014-2015 Shanghai Composite Daily Chart
Larger Image

ASHR 2014 Daily Chart
Larger Image

 


For further reading on this idea and concept, see:
China Flirts with a Major Breakout
Climbing the Great Wall of Worry in China
Taking Off in the Rain

 

Back to homepage

Leave a comment

Leave a comment