Recent top-down data out of China has been weak (see How worried should you be about China?), but there are some signs of healing as the latest round of stimulus kicks in.
Real-time signs of recovery
While Chinese economic statistics can be fudged, real-time indicators are pointing to signs of recovery. Firstly, the stock market indices of China and her major Asian trading partners are all exhibiting constructive patterns of bottoming. Not reflected in this chart is the 2.7% surge in Shanghai, 1.6% rise in Hong Kong, amid a broad based rally in Asian risk assets Monday based on trade talks optimism.
What about the Chinese consumer? My pair trades of long new consumer China and short old finance and infrastructure China are signaling better times ahead for the Chinese household sector.
There are also signs of stabilization on the infrastructure front. The relative performance of Chinese material stocks relative to global materials has broken up through a relative downtrend. Chinese materials are now range-bound against global materials, which is a signal of stabilization.
Trade peace ahead?
What about the trade negotiations? As we await the news on the US-China trade talks, Reuters reported that Chinese negotiators will arrive in Washington this week for the next round of talks, while both sides made encouraging sounds about the discussions:
The United States and China will resume trade talks next week in Washington with time running short to ease their bruising trade war, but U.S. President Donald Trump repeated on Friday that he may extend a March 1 deadline for a deal and keep tariffs on Chinese goods from rising.
Both the United States and China reported progress in five days of negotiations in Beijing this week.
Trump, speaking at a White House news conference, said the United States was closer than ever before to “having a real trade deal” with China and said he would be “honored” to remove tariffs if an agreement can be reached.
The real-time indicators of trade negotiations, namely iShares China (FXI) and soybean prices, are testing key resistance levels after undergoing a bottoming process.
Another possible bullish factor is the upcoming MSCI decision to possibly raise the weight of Chinese A-shares in its global indices (via CNBC):
Chinese A-shares — or yuan-denominated stocks traded on the mainland — were included in the MSCI Emerging Markets Index for the first time last year, allowing investors to access the Chinese equity market more easily. Now, MSCI is considering whether to further increase the weighting of A-shares in its indexes, and could announce its decision by the end of this month.
Should we see a positive resolution to the talks, a Potemkin trade deal, or even a delay of the tariffs that take a full-blown trade war off the table, expect upside breakouts on these instruments, and a trading opportunity for further profits ahead.
Chinese weakness? That’s so 2018.
A few months ago when I forecast a new bull market had begun in China at the end of October, the key was Central Bank policy there had turned to easing. The this was the last of my three Big Picture events to come into play to kick off a new bull market. VALUE (cheap) and SENTIMENT (market down 30%) had already fulfilled.
Every time Central Bank policy turns positive and we know that is when the economy is ugly, investors doubt if the easing will turn the economic tide and have stocks go up. It ALWAYS works. If the first dose is not enough, the will do more and more and more.
A confirmation is their OECD leading economic indicator has turned up.
My key skill is identifying these cyclical turning points. I’m sharing what I’ve learned.
Kudos to Ken MacNeal for having the foresight to call a bottom in China a few months ago. Seemed like a risky call at the time. Way to go Ken!
Indeed! Thank you, Ken, for sharing your insights.