ASIA UPDATE AND OUTLOOK Till January 2016 - PART 1 - CHINA, JAPAN

Asian Equities Suffer

Despite the obvious technical analysis divergence I spoke of in my last post, equities in Europe and the US have been rallying again following the harrowing terrorist attacks in Paris. Asian equities did not share the same positive momentum. 

There are the obvious reasons, like 

• a strong USD acts as a magnet for moneys from all over the world. Why invest in a country with an uncertain investment environment when you can have USD safely and - hopefully with a little more interest to boot.
• USD investors will sell overseas holdings and return to the US in search of investment opportunities. (At some point, the strong dollar will flow into foreign lands again to buy bargain Asian assets. That point is in the distant future!)
• The currency war is by no means over, and Asian currencies suffer tremendous volatility. 

But there are also country specific factors, which add to the conundrum. Let's look at some of the bigger Asian country indices: 

China

Here we have to consider two separate markets: 

1. the Hang Seng in Hong Kong, to which almost everybody can subscribe (except the general public in Mainland China). Here, mostly H-shares and a selection of A-shares are traded.
2. The Shanghai Stock Exchange (SSE), to which only a select group of foreign investors has access to. Here, A-shares are the main equities they can buy. 

Since last year, an agreement between Hong Kong and Shanghai (China), the so-called 'Shanghai Hong Kong Connect', has sharply increased the flow of investment money, with many more fund houses and institutions obtaining RQFII (Renmimbi Qualifying Foreign Institutional Investor) quotas necessary to buy A-shares (and other financial market assets) in Mainland China. Subsequently, the momentum changed dramatically in both the SSE and the Hang Seng. Still, there are major differences. For now, the Hang Seng remains the "playing field" of foreign institutional investors. 

1. the Hang Seng

Since November 5, the day, I switched portfolios to safety, the index has seen losses of 5.4%, and the trading volumes on sell-off days are increasing. This result is substantially worse than in Europe or US. My arrows paint a downward path through December and beyond.  Anyone buying into the Hang Seng at this point must have the patience of an angel, plenty of time to wait for a positive result and an above average risk appetite. 

You may wish to refer to the performance history since June this year. In the table below, the Hang Seng is in ORANGE. We are a long way off this years high points of 28524! And there is more bearish momentum to come.

% changes in the indices during their respective
 correction and the following recovery till 2nd November 2015

2. the Shanghai Stock Exchange - SSE

SSE in November - with possible path into
December

From late October, the SSE (in the table above in Turquoise) rallied strongly till November 2nd, and it managed to keep in range during the selling pressures thereafter, till - November 27. Dropping 5.5% on the day, it gave back the entire profits it made during November. Another red candle on the 28th, as big and bold as the day before, confirmed that the bears are taking charge. My outlook for December is marked with arrows: I expect the index to remain at this level that we see today. 

In a previous article I begged the question whether, at least in the Mainland China shares, the selling pressures had exhausted itself and that maybe a new upward trend could soon start. After all, they had the worst losses of any global index this year. So, a new upward trend is still a possibility, purely speaking from a technical analysis viewpoint. However globally, the mounting negative energies in December and in particular in January will probably suffocate the few positive glimpses that may arise in the interim. 

Japan - NIKKEI 225

In my previous article, I singled out Japan as a market that could spring a few positive surprises, simply because their government and central bank continue along the path of quantitative easing in a big way. Getting Japan out of a 20-year long rut is a major achievement, at least in stock market terms. When the overall appetite for risk goes down, however, Japan's shares will find it difficult to hold their values. 

It so happened. After November 5th, the index dipped just a few points then rallied to a late November peak (See fat orange arrow). We shall soon see how the index will hold up, or not - as I suspect. My preferred December path is indicated with the orange arrow, pointing lower. The target for mid-December is the support level of mid-October, 18200ish. Yet, it might get back to the levels we see today by year end.

In PART 2 of the update I shall discuss India, Korea, Taiwan, Singapore and Indonesia, to be published this coming Friday.