MARKETS SPECTATOR: China rising

A steady data flow now confirms momentum is shifting in Beijing, creating plenty of room for appreciation in China focused funds as punters reverse short positions.

The view that the Chinese economy bottomed during the third quarter is fast becoming accepted after yesterday’s manufacturing PMI moved back into expansionary territory, showing growth for the first time in three months.

We’ve mentioned previously that there were embryonic signs that momentum was shifting within China and now we are getting steady data flow that confirms this.

In a note from Deutsche Bank, it said the Chinese data published over the month and on November 1 suggested the growth outlook was stabilising. For instance, while the manufacturing PMI dropped to 49.8 in September it recovered back above 50 in October (to 50.2). Export growth accelerated to 9.9 per cent year-on-year in September, from 5.5 per cent the previous month. Money supply growth also accelerated in September, as did industrial production (to 9.2 per cent year-on-year from 9 per cent in August) and retail sales (14.2 per cent year-on-year vs 13.2 per cent). Consistent with all this the leading index rose to 100.49 in September, from 99.81 in August.

Price action in the Shanghai Composite is reflecting the data too, jumping 1.8 per cent yesterday.

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Source: Iress

The above chart of the Shanghai Composite index shows that price action has broken up decisively through the downtrend line and now likely for a test of the resistance line. A successful move up through this level would confirm the beginning of an uptrend.

Interestingly, and as we suggested a few weeks ago, the MSCI China and Guggenheim China Small Cap ETF’s have been significantly outperforming the Shanghai Composite. With foreign money allowed to invest in these vehicles, as opposed to only Chinese residents being able to trade the Shanghai Composite, it’s very clear that funds are now moving back towards the world’s biggest developing economy.

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Source: Iress

The above chart clearly shows the ETF outperformance when compared to the Shanghai Composite.

With the majority of the investment community either underweight or short China-facing investments, there remains a lot of room for further appreciation as participants look to play catch up and reverse these positions.

This should be broadly supportive of our Chinese facing resource names. We’ve already seen the materials and resources sectors break out of their respective downtrends. Now we should continue to see cash being put to work in these sectors as more and more participants join the party.

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