SINGAPORE (Nov 4): Making investment decisions can be difficult at any time, particularly when including internationally listed companies. Investors must also consider the international links and global logistics chains that even domestic investment candidates are exposed to. It takes time for a full picture to emerge, and often by that time, it is too late to rescue some investment decisions and to make new decisions in a timely manner.
Here are some whispers in the wind that suggest investors need to revisit the focus of previous and future investment decisions.
First is the just-concluded meeting of the International Monetary Fund steering committee. China has requested a bigger voting share at the IMF that is in proportion to its status as the second-largest economy. This request was refused and China’s voting share at the IMF remains behind that of Japan.
China is “deeply disappointed” in the IMF’s failure to realign its shareholding structure to recognise the rising influence of China and other fast-growing economies. If China’s attempts to participate in the forums that are used to set the global rules are rebuffed, then it has little choice but to move outside those forums.
That disrupts existing trade agreements, encourages the establishment of new trade agreements and exacerbates the trade war rhetoric. None of these reactions is good for stable investment and it may force investors to make a choice between China-centric and US-centric investment prospects.
This choice is facilitated by the increasing rate of the opening of China’s capital markets to foreign investors. This gives access to a market that has more listed companies than the US stock exchanges.
The renminbi is widely used as a trade settlement currency in countries that border China. China’s investment and trade finance along the Belt and Road participants will increasingly opt for trade agreements denominated in renminbi. With around 152 countries signed up to the Belt and Road Initiative, this poses a challenge to the dollar and US-dominated SWIFT inter-bank settlement system.
Weaponising the SWIFT system for political gain is not beyond imagination. In a most direct intervention yet to manage trade and production, US President Donald Trump’s administration wants to dictate how and where global auto firms can make cars and source parts, according to Bloomberg sources. The White House reportedly wants specific language so that it can unilaterally administer production rules in much the same way as central planners directed the minutia of production in the old Soviet Union. The car industry warns this will lead to higher car prices and lost sales. This direct presidential intervention in supply and logistics chains poses a threat to every investment in supply chain companies.
This is a logical extension of the banning of Huawei Technologies and the blacklisting of 28 Chinese companies that compete with US companies.
Next week, 5G mobile services will be offered by China’s three mobile carriers in 50 cities in 2019. The goal is to reach 340 cities in 2020. China’s artificial intelligence industry and innovation will accelerate, as it is the world’s largest, and leading, 5G consumer market. The investment opportunities are enticing. Market size and ease of market access to listed companies must change the traditional focus of investment managers. It is time to listen to these Chinese whispers.
Technical outlook for the Shanghai market
The Shanghai Index is consolidating near 2,950. The index is oscillating around the support feature provided by the compressed long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. This oscillation area is around 70 index points above the long-term support level near 2,920.
This consolidation is a significant part of the process of building a base or foundation for the resumption of a rally and longer-term uptrend breakout above resistance near 3,040.
Taking a longer-term perspective, the Shanghai Index has traded in a broad sideways band starting in May. The base support of this trading band is near 2,830. The upper resistance level of the band is near 3,040. Since May, the Shanghai Index has oscillated around the central support near the resistance level at 2,920. On Sept 3, the index moved above the 2,920 level. Over the past eight weeks, the index has remained in the upper section of the trading band between 2,920 and 3,040. This shows a bullish bias in the index behaviour and increases the probability of a rebound rally from the long-term GMMA.
The breakout pattern of retreat and rally in the Shanghai Index continues. Investors are watching for the index to rebound away from the lower edge of the long-term GMMA and move above the historical resistance level near 3,040.
The 3,040 resistance level is well established and stopped the market rise in July and again in September. A breakout above this strong resistance level has the potential to be very powerful. There is a high probability the Shanghai Index will consolidate near the 3,040 level prior to any breakout activity.
The potential future development of the four-part breakout pattern is shown by the thick lines on the chart. Traders and investors wait for the pullback to successfully test the support areas before developing a new rebound rally and retest of resistance near 3,040.
The trend breakout and uptrend trend continuation are confirmed when the index hits the support areas near 2,920, consolidates and then develops a rebound rally. This is the current environment. Trend continuation is confirmed when the index is able to move above resistance near 3,040. A breakout above 3,040 has an upside target near 3,120.
A sustained fall below support at 2,920 has a target near the lower edge of the trading band near 2,830.
SGX ETFS
Daryl Guppy is an international financial technical analysis expert and special consultant to AxiCorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for more than a decade. Guppy appears regularly on CNBC Asia and is known as ‘The Chart Man’. He is a national board member of the Australia China Business Council.
