It is becoming increasingly difficult to ignore or discount the sustained attack on China on many fronts by the US. As much as we might want to say it has nothing to do with us, the reality is that this concerted attack will impact investment decisions and portfolio construction.
Consider an exchange-traded fund (ETF) that tracks Asia-tech companies through their US listings. It had a 30% return in 2020 and makes a very useful addition to an investment portfolio. It includes Tencent, Meituan Dianping, Alibaba and JD.com.
Now investors must consider the sovereign risk involved in holding this ETF. What happens to performance and valuations if the US moves to ban the products or services offered by these companies? The proposed ban on TikTok is just another example and follows the Huawei ban and the recent blacklisting of 241 Chinese companies by the US.
What happens if an Executive Order is used to suspend trading in one of these 241 companies on US exchanges? It is extreme, but in the current belligerent environment it is not beyond belief.
The US has imposed sanctions on companies which do business with Chinese companies that are involved in any way with counterparts deemed to be involved with human rights abuses. This needs a very careful reading because it impacts banks, companies sourcing a range of goods that are in no way associated with human rights abuses, and working with individuals who may be in some way implicated in this very wide net cast by the US.
A bank that provides banking services to a company or a person deemed to be on the blacklist of 241 may find itself hampered in completing counter-party dollar exchange services. It may itself end up on a blacklist. A successful importer may find it has an inadvertent loose supply connection with a company that is alleged to be involved in rights abuses and the importer may face US sanctions.
This extra-territorial reach by the US cannot be discounted. Recent comments from Secretary of State Mike Pompeo suggest a ramping-up of these coercive activities and this creates a significant investment impact.
Pompeo has proposed a travel ban on all members of the Chinese Communist Party and their family members. Putting aside the morality of this ban, we need to consider the impact on tourism in a post-Covid period. Membership of the Communist Party offers advantages in both private and government careers in China. It is a fact of life, just as being a Republican and a Trump supporter currently offers career advancement in the US.
To impose a blanket travel ban on Communist Party members and their families initially only impacts travel into the US. Even so, taking these bookings out of the US tourism industry and airline traffic has a significant impact. Add this to the airlines’ existing woes and they become even less attractive as an investment.
Add to this the US sanctions imposed on Hong Kong, and investors have an urgent need to carefully evaluate the balance of their investment portfolios. While this political activity is confined to the US, it has limited impact on investment portfolios. The extended reach of this sanction activity can have a significant negative impact on investment distribution.
Technical outlook for the Shanghai market
The pullback in the Shanghai Composite Index has provided a rebound point and an anchor point for the placement of a new uptrend line. This is marked as line B on the chart. The placement of this line needs to be confirmed by another rally, retreat and rebound pattern before the line can be used with confidence for defining the trend.
However, the new trendline B offers a new way of calculating future trend support and appropriate stop-loss conditions. This rebound rally is further confirmation of the strength of the trend and provides a high probability of a move above the recent highs near 3,440.
Some investors remain concerned about the speed of the rally and the sustainability of the rebound. This concern is allayed by applying Relative Strength Index (RSI) analysis. The RSI divergence signal is very reliable when applied to the Shanghai index. The divergence happens when the trendline placed on the index moves in the opposite direction to the trendline placed on the RSI indicator. When a divergence occurs — when both lines are moving in opposite directions — it suggests a high probability of trend reversal on the Shanghai index.
The RSI does not show any divergence pattern. The RSI is currently acting as a confirmation signal, with the RSI making new highs that match the new peaks on the Shanghai index. This is a bullish continuation, so investors should watch for a continuation of the current rebound.
The first resistance level for any uptrend continuation is near the recent highs around 3,440. However, the longer-term upside target is near the 2017 highs around 3,550. This is also an important longer-term resistance level that defined a resistance area in 2015.
The key feature to watch as the rebound develops is the way that any area uses support features because retreats within the trend are inevitable. There are three support features to consider.
The first support level is the value of trendline B. This is currently near 3,300.
The second support feature is the value of the upper edge of the longterm group of moving averages in the Guppy Multiple Moving Average indicator. Current value is near 3,177.
The third support feature is the value of the longer-term uptrend line A. Current value is near 3,128. It is important to note that the index can fall below trendline B and move all the way down to the value of trendline A and still remain in a long-term uptrend. A fall of this magnitude would be uncomfortable for investors, but it would not signal a trend change.
