The Shanghai Index is plumbing new depths and the Chinese economy is stuttering. Yet, I am particularly excited about the prospects for 2024. It is not that I am a contrarian. It is because the 2024 outlook has eight factors in its favour that make China both an attractive investment destination and an excellent trading environment when it comes to financial markets.
I join investment master Warren Buffett when I consider the first reason for an optimistic outlook for China in 2024. One of his maxims says: “Price is what we pay and value is what you get.” This underpins his philosophy of buying good companies at favourable prices. It is the perfect approach for China with so many good companies oversold in this extended bear market.
Some of these oversold companies are global leaders in their fields and they will stand the test of time. Others are well-established and reliable suppliers of consumer and industry essentials that do not rely on discretionary spending. Haier is one example. Others are emerging companies with business-changing products or services but cannot attract market support in this bearish environment.
China has many good companies with stocks at favourable prices so investors should wait for evidence of the inevitable market recovery in 2024.
The second reason for excitement about China is the massive pile of household savings. There was a record RMB135 trillion ($25.7 trillion) in household bank accounts last year. Unlocking these savings will drive domestic consumer demand. It is a key part of the dual-circulation policy that is designed to re-orientate the economy and reduce its dependency on traditional export markets.
The policy initiatives of the central government in Beijing are designed to encourage consumer spending and business growth. Already, we see an increase in discretionary spending on tourism and entertainment. These are early indicators of economic health. Discretionary spending leads the flow of capital into financial markets. The China market is heavily influenced by retail activity and these renewed capital flows will open up many opportunities.
See also: China tightens securities lending rule to support stock market
The third factor is technological advances and the growth of the digital economy. These include the development of applications for 6G mobile networks that will drive the Internet of Things. In December, I visited Cloud City in Hangzhou and caught a glimpse of China’s digital and technological development. This week, Huawei launched 5.5G, which is 10 times faster than 5G. It is no wonder the Americans are worried about being left behind.
These are digital developments that enhance productivity and help China escape the middle-income trap. There are developments in environmental and weather monitoring that increase agricultural productivity too. These are the foundations of a truly digital economy which will boost economic efficiency. They also lay the foundation for the next TenCent or Amazon which opens up trading opportunities if these companies list on the stock exchange.
This then leads to the fourth factor which is of particular interest to traders. Already, China’s financial markets offer many short-term trading opportunities. Recent examples include Jiangsu Rijiu Optoelectronics Jointstock Co (stock code 003015) with a two-week return of 58% and Shenzhen Zhongheng Huafa Co (000020) with a 27% return over five days. Increased capital flows can only expand them.
See also: In the Year of the Dragon, expect new growth patterns and drivers in China: Fidelity
Next week, I will examine my remaining four reasons for 2024 optimism.
Technical outlook of the Shanghai market
The Shanghai Index chart does not reflect my optimism. The weak support near 2,780 was broken as the Shanghai Index continued its plunge. There is a substantial gap developing between the lower edge of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator and the upper edge of the short-term group of averages. This shows that selling pressure is unrelenting.
The downtrend shows no evidence of weakening and the trend is accelerating. The long-term group of averages in the GMMA remain well separated showing consistent selling by investors. There is stronger historical support near 2,670 and this is the next downside target.
Given the acceleration in the rate of fall, there is a strong probability the market will dip below support near 2,670. Traders will watch for a rebound from this dip to signal that it is an exhaustion move. An exhaustion move is where the candle has a long tail followed by a strong intraday rebound. This is often a sign that extreme selling has ended and that consolidation may develop.
Traders have not improved their outlook so the short-term group of averages are maintaining wide separation.
There are now four possible resistance points which limit the ability of the market to move to the upside. The first resistance feature is the previous support level near 2,780. This will now act as a resistance feature for any market rebound. The second resistance feature is the lower edge of the long-term group of averages. The third resistance feature is the value of the upper edge of the long-term group of moving averages. The fourth resistance feature is the value of the long-term downtrend line, currently near 3,000.
The period leading to Chinese New Year often includes strong selling as investors “sweep” last year’s bad luck out the door. Traders in particular remain alert for signs of consolidation and rebound opportunities but these are all short-term.
Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a former national board member of the Australia China Business Council
