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Market outlook

Q3 2022 global markets emerging theme: easing inflationary expectations offer relief rebound in equities & bonds (Part 3)

China stock market

This article is written by CMC APAC market analysts; Kelvin Wong, Tina Teng, Azeem Sheriff & Leon Li

 

China stock market’s medium-term uptrend remains intact but at risk of a short-term pull-back

Since March 2022, the SSE Composite Index has suffered a sharp decline due to the stringent Covid lockdown measures that hit a low point of 2863.64 on 27th April. Thereafter, it rebounded for two consecutive months, which bucked against the downtrend of other developed nations’ stock markets. The reasons for the rebound can be explained below:

  • The epidemic peaked in April, and the number of new Covid cases dropped sharply in May which in turn triggered a positive feedback loop back into the China stock market in anticipation of a toned down in the restrictive measures. Eventually, the Chinese government lifted most of the earlier imposed stringent lockdown measures in June.
  • The central government together with China’s central bank, PBOC have implemented several accommodative policies to support an economic recovery. The government has introduced a series of measures to stabilize the real estate market, such as lowering the down payment ratio, lifting the purchase restriction, and providing housing subsidies. In addition, PBOC has implemented a further cut in the loan prime rate (LPR) to expand the social financing scale and enhance the confidence of enterprises and residents, thus stabilizing employment and expanding domestic demand.
  • Infrastructure, employment, real estate, and manufacturing have improved to varying degrees. Infrastructure and manufacturing are the main driving forces for an economic recovery in China. In June, the official manufacturing PMI rose to 50.2%, and social financing increased by 2.79 trillion yuan in May, far exceeding market expectations of 2.37 trillion yuan. Also, social financing is expected to expand further in June under the increasing scale of enterprise production and money supply (M2) is expected to grow by more than 10% year-on-year in June.

SSE Composite Index’s outlook for Q3

SSE Composite Index, Weekly

(click to enlarge chart)

Source: TradingView as of 26 Jul 2022

  • The weekly chart has shown that the SSE Composite Index has oscillated within a volatile major uptrend structure since 2013 that has continued to find support on a major ascending trendline in place since July 2005, where such a positive scenario is expected to continue under the likelihood of more potential accommodative fiscal and monetary policies.
  • In addition, the weekly MACD indicator, a gauge that measures changes in trend direction has shown a clear golden cross signal which suggests a potential medium to long-term rebound scenario in Q3.

SSE Composite Index, Daily

(click to enlarge chart)

Source: TradingView as of 26 Jul 2022

  • The price actions of SSE Composite have risen continuously since May 2022 without a significant pullback and since the first week of July 200, it has started to consolidate near the 250-day moving average that is acting as an intermediate resistance at 3,440.
  • The prior increase in trading volume of the SSE Composite seen in May till mid-June 2022 has started to moderate and contract towards the end of June indicating that the aggregate market participation has started to wane and current price actions of SSE may lack inertia to stage a potential higher pushup.
  • In addition, the daily MACD trend indicator has flashed out a prior bearish divergence signal followed by a recent death cross on 6 July 2022.
  • Short-term support zone is expected to be at 3,220 which is neared the 60-day moving average. If price actions break below 3,220, it may stage a deeper corrective pull-back towards the medium-term support at 3,160.  
  • On the other hand, a clearance above 3,440 may see a further acceleration to major range resistance of 3,720 in place since February 2021.
  • China is in the early stage of an economic recovery phase and monetary policy will likely remain loose. The accommodative financial environment and low valuation will likely continue to attract foreign investment into A-shares.
  • The current recovery is mainly driven by the manufacturing sector and infrastructure spending via fiscal policies. Given that real estate investment growth is still negative, consumer spending has remained lackluster due to a less rosy employment market and the risk of another epidemic outbreak remains on the horizon (recent rapid increases of new Covid cases in Zhejiang, Anhui Provinces). Therefore, favorable monetary and fiscal policies are expected to continue that are likely to support the ongoing medium-term uptrend seen in China’s stock market.

​China Sectors Outlook

CSI China New Energy Index, Daily

(click to enlarge chart)

 

CSI China Photovoltaic Industry Index, Daily

(click to enlarge chart)

Source: TradingView as of 26 Jul 2022

The manufacturing industry which was most affected by the lockdown in Shanghai had recovered significantly. Photovoltaic (PV) Industry Index and New Energy Index had rebounded significantly in the last two months, and the magnitude of their respective rallies had surpassed other sectors. Also, their price actions have broken above the 250-day moving average which indicates a bullish trend.

However, the MACD trend indicator has flashed a bearish divergence signal, and thereafter the New Energy Index has continued to stage a pull-back since early July 2022. Watch the 250-day moving average support at 4000. If price actions break below 4,000, it may lead to a deeper corrective pull-back towards the medium-term support at 3,840. Thereafter, it may stage another potential up move towards the next resistance at 4,800 in the latter part of Q3.

Similar observations can also be seen in the Photovoltaic (PV) Industry Index; at risk of a short-term pull-back towards the 5,000 short-term support in the first step. Thereafter, it may stage another potential up move towards the 5,750 resistance.

CSI China Real Estate Index, Daily

(click to enlarge chart)

Source: TradingView as of 26 Jul 2022

Real estate developments and domestic consumption have been lackluster. Both real estate investment (-4%) and total retail sales of consumer goods (-1.5%) have recorded negative year-on-year growth from January to May 2022. As a result, the central government will adopt more accommodative fiscal and monetary policies to expand domestic demand to achieve the goal of China's steady economic growth in 2022.

China’s property sales data started to pick up in June with the support of government policies, and the Real Estate Index has rebounded in recent days. However, the Real Estate Index has remained in a sideways range configuration despite a series of favorable policies. The lack of optimism can be attributed to two reasons; some real estate enterprises are still facing liquidity risk and the lack of housing demand from homeowners because housing prices are still relatively high. Hence, the overall trend of the Real Estate Index is likely to oscillate sideways between 4,600 and 4,000.

CSI China Consumer Staples Index, Daily

(click to enlarge chart)

Source: TradingView as of 26 Jul 2022

The Consumer Staples Index has started to evolve in a short-term pullback motion since early July 2022. Watch the medium-term support at 22,000, investors can pay attention to Baijiu, household appliances, electronics, and food & beverage-related equities. A break above the 24,500 key intermediate resistance may see a further potential up move towards the next resistance at 26,000 in the latter part of Q3.

CSI China Infrastructure Index, Daily

(click to enlarge chart)

Source: TradingView as of 26 Jul 2022

The Infrastructure Index is still trading at a relatively low level versus other sectors but its current medium-term up trend from its May 2022 low has remained stable and its valuation has not been overstretched. In the second half of the year, it is expected that infrastructure investment in China will likely increase further which in turn can help to alleviate unemployment and achieve the goal of steady economic growth. Watch the 1,400 resistance level for Q3.

CSI China Semiconductors & Semiconductor Equipment Index, Daily

(click to enlarge chart)

Source: TradingView as of 26 Jul 2022

The recent rebound seen in semiconductors is not strong in terms of magnitude versus other outperforming sectors. The main reason is those semiconductors chip manufacturers are still in the state of expanding production, but the shortage of chips has eased compared with last year, and inventories have been overstocked.

In addition, the recent Covid lockdown measures also led to a reduction in their orders books. Moreover, consumer demand for digital products, household appliances, electric tools, and other products has decreased which in turn has negatively affected the performance of the semiconductor industry. Hence, the recent rebound of the Semiconductors & Semiconductor Equipment Index has been relatively weak.

In line with the possibility of more accommodative policies being implemented in Q3, consumption of household appliances will likely improve which in turn may increase the demand for semiconductor chips. Watch the first resistance level on 6,500. A break above the 6,500 may see a further potential up move towards the next resistance at 7,300.

Click here to read Part 1 & here for Part 2


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