SINGAPORE (Apr 22): Warren Buffet infamously bought into Chinese electric car maker BYD. The investment initially turned sour and many joked that BYD stood for Break Your Dreams. Now, that is no longer the case. Shenzhen has replaced its entire taxi fleet with electric vehicles, most of them manufactured by BYD.
China is heavily committed to cleaning up pollution. Investing in the Chinese clean-energy industry offers many opportunities.
Part of the policy initiative is the rapid phasing-out of petrol- and diesel-driven vehicles and their replacement with electric vehicles. Foreign companies are already expanding into this market and using China as a test bed for the design and development of vehicles that can be exported to Europe, as the same pollution measures are applied by the European Union.
Volkswagen (VW) plans to build an electric sport utility vehicle (SUV) for the China market, which will go on sale in 2021, taking on the Chinese market leader Tesla’s Model X.
The new SUV is the latest move in VW’s growth strategy in China, where electric cars are given preferential treatment by the authorities. VW says it plans to produce more than 22 million electric cars in the next 10 years. Around half of VW’s engineers are working on products destined for China. VW is considering expanding its stake in its Chinese electric-vehicle partner Anhui Jianghuai Automobile Group Corp (JAC) after rules on ownership were eased last year.
The Shanghai cross-trading platform gives investors access to other electric vehicle manufacturers and manufacturing hopefuls such as SAIC Motor Corp, JAC, BYD and FAW Car Co.
Some, such as SAIC, are well established and listed in Shanghai. Like the general Shanghai market, SAIC has emerged from a prolonged downtrend. It has established a new, if erratic, uptrend. It offers good shorter trend rally-and-retreat trading opportunities.
VW partner, JAC, has already been boosted by the VW announcement with a sharp 48% rise. This fast rally is pulling back, and investors will watch for the development of a smoother long-term uptrend. Traders will enter on the rally rebound.
BYD was listed on the Shenzhen exchange as a tech startup but, like many on this board, it has settled into a more stable trend behaviour. BYD is trading in a steady uptrend and approaching previous resistance levels. There are regular opportunities to enter at points of temporary weakness.
FAW has more of the characteristics associated with a high-tech Shenzhen listing. The uptrend is punctuated by fast upmoves built around a steady uptrend. Most recently, FAW has seen several days of “limit up” trading, where the price has been locked at the maximum 10% daily move. Traders will struggle to get a position, but these sustained “limit up” moves offer good trading opportunities once normal trade activity returns.
When Buffet bought into BYD, it was a difficult process requiring layers and layers of approvals. Today, the China direct investment opportunity is much easier. The Shanghai Connect and Shenzhen Cross Connect platforms allow for direct trading of Chinese stocks. The global universe of trading opportunities has expanded and is easily accessed. This gives investors an opportunity to take early positions in China’s electric vehicle future.
Technical outlook for the Shanghai market
The 3,210 level in the Shanghai Index is one of the critical levels. It is the top of a historical trading band. The lower level of the trade band is near 3,040. In the current Shanghai Index rise, this trading band has not exerted a significant influence, despite its prolonged influence on the market for much of the early part of 2018.
This is significant because it indicates a greater level of strength in the current Shanghai Index uptrend. A weakening uptrend would have seen the index cluster between 3,040 and 3,210, trapping the market in a rally-and-retreat pattern. This has not happened.
Instead, the market developed a wide oscillation around 3,040 before moving very quickly to the upper edge of the historical trading band near 3,210. Again, the index has repeated this wider oscillation around 3,210 rather than using 3,210 as a resistance level.
This suggests the market has acknowledged these support and resistance levels, but the market is not dominated by them. The conclusion is that this confirms a more bullish environment with the strong potential for a sustained breakout above 3,210.
The upside target for this breakout is near 3,420. This is a major resistance area that appeared in the market in 2014, 2015 and 2017. Traders and investors can anticipate strong consolidation around this area, following any breakout above 3,210.
The weekly Shanghai Index chart shows a strong and well-defined Guppy Multiple Moving Average breakout. The long-term GMMA has compressed and turned upwards. The short-term GMMA is well separated. The lower edge of the short-term GMMA is above the upper edge of the long-term GMMA. This is usually associated with a sustained trend breakout and the development of a new uptrend.
The weekly GMMA and the trading band analysis suggest there is a high probability that the current breakout will continue towards the upside targets near 3,420.
The GMMA relationships on the daily chart confirm the weekly chart analysis. Currently, the long-term GMMA is widely separated and has developed no indication of compression in reaction to the index oscillation around 3,210.
Trend support has been successfully tested, with the index rebounding from the lower edge of the short-term group of averages in the GMMA indicator. The index has resumed clustering around the upper edges of the short-term GMMA, and this is evidence of very strong support for the trend.
The final bullish feature is the continued strong separation in the long-term group of GMMA averages.
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 more than a decade. 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
