China’s stock index is getting oversolda
INVESTORS barely had time to digest the news that the Conference Board had downgraded its leading indicator for China before stock markets tumbled across the world earlier this week.
And although the markets’ sensitivity to the powerhouse of the east remains as strong as ever, the equity market in Shanghai has suffered more than its western counterparts. It is down more than 25 per cent since the start of the year, compared to the S&P 500, which has fallen 5 per cent in the same time period.
But is this rational and can the outlook for China really have deteriorated so much in such a short period of time? Some commentators argue that the Shanghai market actually looks attractive and now is the time to buy.
Firstly, fears about growth could be overdone. The Conference Board cut its forecast for growth in April from 1.7 per cent to 0.3 per cent, which is still better than what most western states can achieve. In fact, back in the first quarter of this year investors were worried about an overheating economy when growth expanded by 11.9 per cent. Estimates for the second quarter are lower, nearer the 10 per cent mark, but growth at this rate would still leave China as the main driver of the global economy. As Mark Williams at Capital Economics says: “Year-on-year growth will slow further, although this is far from the hard landing that many have warned of.”
Retail sales have slowed, but Williams notes that they have held up well in nominal terms. He also remains unconcerned about the prospect of a revaluation of the renminbi. Not only is the pace of reform expected to crawl along at a snail’s pace, but “fundamentally, though, the renminbi would remain on a crawling dollar peg”, adds Williams. In that case, concerns that a stronger currency could weigh on China’s export competitiveness seem overdone.
In fact, Pierre-Yves Gauthier at Alphavalue says that the impact will be keenly felt by
non-food retailers in the west who produce their goods in China, such as Adidas, Hennes
& Mauritz and Next. “This could have an impact on the cost bases of these companies, for example some of them get 20 per cent of their supplies from China.”
Trading the Shanghai stock market using listed products is a good way to get exposure
with only limited downside risk, which is especially attractive during this skittish period
in the financial markets. But while the market got too carried away on dreams that the global economy would be saved by China, fears that its economy will stall seem outlandish, leaving an opportunity for investors who continue to believe in the long-term prospects for China.