China stocks - consolidating still?

Chinese stocks, both 'A' and 'H' shares, have seen meaningful corrections over the last few months. While 'A' shares responded promptly to government measures that were introduced of late by turning down accordingly, 'H' shares had other factors influencing its pricing, - mainly foreign investment flows.

The question now is, when will we see a positive turn-up that can be sustained for some months?  Investing today and having to disinvest a few weeks later is a cumbersome and unreliable way to make money. 

When will the turning point come?
What are the accompanying signals? What are the downside risks?
And - if China is really such a phenomenal driver of the global economy, why are we not making more money?

'A' - Shares

 

China 'A' Shares since June 2010

 I wanted to show you this graph again, which is an updated version of one I published in August/September of last year.  At the time, I was looking at a much more detrimental outcome, with November 2010 as the low - and turning point for 'A' shares in Shanghai.  What is worthy of note is that my red dot, originally placed for end of October 2010, has become exactly the price level where markets corrected eventually, - though we had to wait for it till January 2011: Size-wise correct, but timed too early.  Nonetheless, investors who took the advice in September 2010 are now able to repurchase the same fund at a discount of about 8%. In the meantime, the Renminbi also lost out to the SGD, bringing the total discount to nearer 10% today. 

For the 'A' Share index in Shanghai, the 2800 level should now provide ample support for any potential correction in the short term, and I reckon that markets will start rallying, if not NOW - then soon, may be as late as the second week of March. A rally is definitely on the cards: 

• both MACD and RSI indicate an upward trend, i.e. in the direction of the current market move,
• the Ichimoku cloud is guiding the prices towards its thinnest point to break through and above 
• headwinds by way of government measures are now firmly priced in - or so I think.  

This paints a rather positive picture for Mainland China stocks going forward.  I therefore indicated with the green arrow the direction and target over the coming 2-3 months aiming at 3210 as a respectable peak level.

'H' - Shares

HANG SENG - put a lid on performance targets.

The Hang Seng index does not  quite provide the same strongly trending outlook.  Having peaked in early November it is moving sideways with little strength to break out of its current trading range to higher highs just yet.  I therefore would put a lid on any advance by about 26,300 (see purple horizontal line), - a significant top from early 2008, and one which has been viewed as a stiff resistance since. RSI indicates a positive trend but lacks the lavish upside momentum of the Shanghai MACD. The lid should hold for much of this year, i.e. don't expect world class returns from your China fund.

I would therefore attribute a higher risk - reward ratio to H shares by comparison (=higher risk, less potential reward).  What may influence actual returns in funds, will depend on what other Chinese - or China oriented - stocks they will add to the fund.  A strictly 'H' share invested fund will probably disappoint the high expectations of its investors, while a Greater China Fund may find more opportunity and additional returns in such places as Taiwan for instance.  Taiwan is heavy on tech stocks, which have lagged many other sector stocks for a long, long while. It might just change now. 

TAIWAN STOCKS

Taiwanese shares
- low volatility - promising risk/reward ratio

Painting a picture of low volatile, steady rise from June 2010 to February 2011, this is an index, which even the swift -8% corrective move after Chinese New Year could not deter from its present upward trend.  RSI looks set to support any rise from now, while the MACD will probably take another few days before it will confirm it.  Having found good support in the Ichimoku Cloud, rising stock prices from hereon in are forecast (after today's -2%-'wobbler', that is!).

Risk / Reward Play

So what are the downside risks?  Pure and simple:  In case you did not notice, - we saw foreign investors shift considerable moneys away from the emerging economies back to developed markets since November last year. Those same investors will return to Asia when they see their home markets fully valued with little chance for more upside. We may have to wait till we reach the 13,000 level in the DJIA, and 1,350/1,370 in the S&P 500. That is when Asia will be back in favour - at the latest!

Lets just wait for these few days' roller-coaster action to draw to a close and culminate in a turning point of significance.  Watch this space for the right signal!