Markets: China is our market's best fortune teller

Our Asian neighbours, not the US, are the best guide for Australian shares. And the future looks bright.

Australian investors keep a close eye on overnight action in US markets as a means of providing direction for our local market’s trade for the day. But the ASX 200 actually shows no correlation with the US-based S&P 500 and has not for the past year, at least.

It is however a very different story when we cast our eyes across to parts of the Asian region. The correlation between the ASX 200 and the Hong Kong and Chinese indices has strengthened since the start of this financial year in comparison with the past twelve months. In contrast, the correlation between the ASX 200 and the S&P 500 has remained much the same, around 0.05 per cent, an insignificant level.

Statistical relationships do change over time, but the data concludes we aren’t as closely linked to the movements on the S&P 500 as we may have once thought.

In terms of share price performance, the gains since the start of this financial year have been as follows; ASX 200 (white line) at 11.59 per cent, Shanghai Composite (green line) at 10.62 per cent, the Hang Seng (blue line) at 12.28 per cent and the S&P 500 (pink line) at 5.11 per cent.

These index returns reveal the correlations we have been seeing.

Graph for Markets: China is our market's best fortune teller

Recent economic data from China suggests it is on track to reach GDP growth of 7.5 per cent for this year, making that an attractive market to be shadowing. In addition to this, China is our number one trading partner accounting for close to one third of our exports.

The string of solid economic data from China has provided the ASX 200 with extra buoyancy due to these intertwining relationships.

Unlike much of the developed world, the Chinese-based Shanghai composite and Hong Kong’s Hang Seng index are operating in countries not undertaking any form of monetary stimulus or bound by interest rates at close to zero per cent. While this doesn’t seem to be a market driver at present, it could become one depending on what happens with tapering in the US. 

The two Asian indices referenced have been climbing along with the iron ore price. Recently the iron ore price
(red line) has essentially acted as a leading indicator for the Asian bourses, lifting our market up along the way.

Graph for Markets: China is our market's best fortune teller