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Rebalancing China investment

Daryl Guppy
Daryl Guppy12/11/2020 06:31 AM GMT+08  • 6 min read
Rebalancing China investment
Rebalancing China investment.
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What a contrast in the approach to China.

Singapore has announced full engagement with the Belt and Road Initiative (BRI) blockchain development, emerging trade protocols and settlement built around China’s sovereign digital currency.

The Australian government, on the other hand, has passed legislation giving the federal authorities the power to veto cooperative memorandums of understanding (MOU) signed by the states with China.

This includes any BRI involvement and the power to overturn university research cooperation with Chinese universities.

It is also aimed directly at trying to remove the Confucius Institutes, which are the public educational partnerships between colleges and universities in China with schools across the world to make Chinese language and culture more accessible.

This is more than just an interesting comparison in attitudes towards engagement with China. These two opposing approaches have significant investment implications.

For Singapore, these implications are good. Companies who strengthen their involvement with BRI stand to expand market share and participation.

Singapore’s cooperative digital engagement with Australia, by contrast, becomes a much less attractive investment proposition so investors must move quickly to rebalance portfolios. There are six areas that require rapid attention from Singapore investors.

The first is investment exposure to commodity producers which supply directly to China. This group includes beef producers and agricultural suppliers. China is moving away from reliance on these groups and substituting the product from other sources. It will take considerable time for these Australian producers to find replacement markets so they will come under price pressure.

The second investment exposure is in customer products. Wine is the most obvious example, but the list of consumer goods grows more widely. The daigou (a term for cross-border exporting where an individual or a syndicated group of exporters outside China purchasing luxury goods and even infant formulas for customers in China) trade which underpinned the healthy share price growth of Blackmores and other health supplement manufacturers has declined dramatically. It was once considered a Covid-19 impact, but the current environment puts these at regulatory risk.

The third investment area is the logistics and supply chains. This includes agri-business groups such as GrainCorp, as well as shipping and transport groups. As market access declines, then demand also declines along with share prices.

The fourth area is international student and education. This is a major income earner for Australia. What has been a Covid-19 induced slump may morph into a more permanent downturn as China pivots away from Australia as an education destination.

If academic research and cooperation opportunities are limited, then students will look for alternative suppliers. This is good for Singapore, but not good to listed companies involved in the Australian education sector.

The fifth area is the resumption of property growth in Australia. With a broader objective of no net-immigration for 2021-2022, there is less demand imperative. Low interest rates by themselves will not be enough to sustain the growth trajectory this industry has seen so Australian REITs become less attractive.

The sixth area to approach with caution is the resources sector. Iron ore seems immune at the moment, but the coal sector has been hit hard with a severe reduction in China’s demand for Australian coal.

China is, and remains, the most significant global market. For many economies, their post-Covid-19 recovery will rest on China’s economic recovery and their ability to engage with this.

Singapore’s decision to do so lifts its investment opportunities. Australia’s refusal to engage diminishes investment prospects.

Investors must look to rebalancing their portfolio exposure if they wish to benefit from China market growth.

Technical outlook for the Shanghai market

The Shanghai index has retreated strongly from resistance and fallen below the short-term uptrend line.

The move below the uptrend line shows the short-term uptrend has failed. The index still has several sound supports features so investors watch for a retreat followed by a rebound and retest of the resistance level.

The 3,450 level has been a strong resistance level starting in July 2020. The current retreat from this level confirms the strength of the resistance feature. It also paradoxically increases the probability of a powerful breakout and a fast move towards the next target level.

Resistance at this level means that many long-term investors are taking consistent profits near this level. This activity is happening across the market and reflected in the index as consistent profit taking around this index level.

This means there are an increasing number of investors new to the market who entered the market near this level. They believe there is a high probability that the market uptrend will continue.

As a result, this means they will hold onto their investments around this level, even if the market falters.

This also means that new investors will need to pay more to enter the market and this adds to the bullish pressure. A breakout above the current resistance levels sets an upside target near 3,690.

The Guppy Multiple Moving Average (GMMA) relationships show strong trend behaviour. The index pulled back to 3,380 at the upper edge of the long-term GMMA but still remains in an uptrend. Further support comes from the lower edge of the longer term GMMA near 3,340.

The current retreat is testing the centre axis of the long-term broad trading band. Investors are watching for the index to develop retreat and rebound activity in the upper half of the broad trading band.

This trend behaviour remains different from the previous trend behaviour when the index moved above the midpoint of the trading band near 3,360. There is limited expansion and compression activity in the short-term GMMA.

The long-term GMMA is well separated. This shows good support for the new uptrend is coming from investors. This separation shows that when the index pulls back the investors use the opportunity to buy the dip.

A rally rebound has an upside breakout target near 3,690. This is calculated by measuring the width of the trading band and then projecting this value upwards. This is a long-term upside target. This calculation does not show how the uptrend may develop.

It may be a smooth trend, or it might be a trend consisting of many small rally and retreat behaviours.

Daryl Guppy is an international financial technical analysis expert and special consultant to Axicorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a national board member of the Australia China Business Council.

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