Indices: China’s Shenzhen CSI 300 Index
The ASX200 punched to new all-time highs on Thursday, ahead of the four-day Easter break, not the move of a bearish/nervous market. Local stocks exited last week, with almost 90% of stocks closing higher on the day, although we shouldn’t get too excited as it was the end of the quarter, a classic time for some “window dressing” by fund managers. MM said a few weeks ago that we wouldn’t be surprised to see a test of the 7900-8000 area by local index this FY, we’re already looking too conservative.
The big news yesterday was China’s industrial production, which came in stronger than expected, rising 7% year on year in February, beating the anticipated 5% and making it the fastest pace of growth in two years. Notably, the markets are very negative towards China; hence, any ongoing signs of improvement are likely to see a dramatic move in some related areas of the market.
Yesterday, the Peoples Bank of China (PBOC) announced lenders had cut their 5-year loan prime rate (LPR) by 25 basis points to 3.95%; it was the first cut since June, reaffirming Xi Jinping’s intentions to reinvigorate their economy, which the prolonged property crisis has weighed down. This was the biggest-ever cut to the key mortgage reference rate as Chinese banks cut rates to incentivise borrowing; the targeted stimulus will increase the potential pool of buyers as apartment prices continue to slip lower.
China’s stock market went into its “Year of the Dragon” celebrations with a rare and much-needed bounce, with the index, ahead of last week’s break, up +8.3% from its 5-year low. However, it would be easy for the bears to justify the gains on simple book-squaring ahead of the long break. Still, at MM, we can see something more meaningful brewing beneath the surface, i.e. Chinese stocks are looking for a low after almost halving over the last two years. While there are no concrete fundamental or technical buy signals in place, we continue to believe a ~20% bounce, at the very least, is close at hand.
Beijing continues to generate market optimism with targeted stimulus, only for it to dissipate after just 24-48 hours. The local Resources Sector is highly correlated to a recovery by the Chinese economy, and while we believe the 3-year decline in Chinese stocks is close to an end, it’s not looked on point so far, i.e. we’re looking wrong at this stage.
The strength being demonstrated by overseas indices may drag the ASX200 to our previously targeted 7650-7700 area, but it’s not felt impressive so far in 2024. While the local index holds below the 7460 level, we remain neutral, although our “Gut Feel” is the current advance that can take the index to fresh all-time highs, similar to many of its peers.
Hi MM team,
The Chinese market has been falling since early 2021, with the main indices down over 40% during this timeframe, while during the same period, the NASDAQ has advanced ~30% – a performance differential to put a fund manager out of business! This is one area where we are sitting in the contrarian corner, which is potentially a very bullish read-through for the ASX Resources Sector:
The Australian resources stocks fell Monday after Asian indices and US equity futures reversed lower, dragging the ASX200 down to 2-week lows following disappointing Chinese industrial profit growth. Profits at China’s industrial firms extended gains for a third month in October but were well below expectations.
