SINGAPORE (June 10): It’s time for investors to start thinking seriously about the impact of US President Donald Trump’s executive orders on investments on both US companies and Chinese companies that are listed in the US. This is swiftly moving from the potential outlier scenario to a very real scenario with rapid impact.
The first scenario is the impact on US companies that have China as a major component of their profitability. I travelled with a colleague this week to Beijing, and it was his first time in China. Among other observations, he was impressed with the large number of US-branded cars. He is a US fund manager. I pointed out that these were American cars manufactured in China and for sale only in China. Now he is worried because the closure of this profit centre impacts on his fund holdings in American car manufacturers.
The first scenario affects companies like Starbucks Corp and Apple that now find China contributes to most of their total global and US sales. A blacklisting of Apple — no different from the backlisting of Huawei — would have a catastrophic impact on your investment in Apple.
The second scenario is the vulnerability of Chinese companies listed in the US. TenCent Holdings and Alibaba Group Holding are two examples. What type of Twitter-generated executive order would be required to suspend trading in these companies? The once unthinkable is no longer unthinkable. Investments made in these US-listed companies may need to be re-evaluated.
The third scenario involves US fund managers who have Chinese exposure. Steve Bannon, Trump’s former chief strategist, says there are continuing efforts inside and outside the administration to rethink China’s role in US stock markets, partly because of a lack of transparency regarding the ultimate owners of Chinese companies. He claims the New York Stock Exchange and Nasdaq are breaching their fiduciary responsibility to institutional investors and the pension funds of hard-working Americans.
There are growing calls on the US side for complete decoupling, which is causing Chinese enterprises to re-evaluate their reliance not just on US technology but also on other US resources, including financial markets. Alibaba held a hugely successful IPO in New York five years ago, but it is now considering also to list its shares in Hong Kong. This is a fallback position.
Scepticism is growing among some administration officials and legislators about the presence of Chinese companies in US capital markets and in major stock indices. In a letter last month, a bipartisan group of senators urged the administration to increase disclosure requirements for Chinese companies listed in the US that pose national security risks or are complicit in human rights abuses. Investors also need to consider Chinese responses. The Chinese central bank and sovereign wealth fund own at least US$200 billion ($273 billion) in shares in the US. This gives China a possible additional weapon should it decide to sell.
Such a move could shake the US stock markets more than China selling US Treasuries. Stock markets tend to respond to movements in smaller sums of money than US government bonds because the market for Treasury bills is simply so big.
Investors need to actively consider and track the development of these financial market scenarios.
Technical outlook for the Shanghai market
The Shanghai Index is putting up a good fight against downtrend pressure, but it is difficult to know if the fight will be successful. There are several bullish features and several bearish ones. The balance has not yet tilted in favour of either.
We start with the bearish features. The most important feature is the development of a down-sloping triangle. This is often a bearish pattern, particularly in a downtrend. A confirmed break below the support level near 2,840 has a downside target near 2,690. This is also a historical support level that was tested multiple times in 2018. This target is calculated by measuring the base of the down-sloping triangle and projecting it downwards.
The second bearish feature is the general nature of the downtrend. The long-term group of Guppy Multiple Moving Averages has turned down but not yet begun to separate. The short-term GMMA remains below the long-term GMMA, and this is generally associated with a bearish condition. The bullish features start with the Relative Strength Index and the continuation of the bullish divergence pattern. The position of the uptrend line on the RSI has been adjusted to include recent index activity. This is a mild divergence pattern with a support level shown as B on the index chart and a diverging trend line on the RSI, shown as B1. The RSI divergence pattern is a reliable indication of trend change when used with the Shanghai Index. The danger comes if this RSI divergence pattern collapses with the RSI falling below trend line B1.
The second bullish feature is the lack of conviction with the long-term GMMA. The long-term GMMA has turned down but has not developed any wide separation. This shows lack of conviction. If investors were convinced that this was a very bearish situation, then the long-term GMMA would expand rapidly. This has not happened, and this is a bullish signal.
The compression in the longterm GMMA shows that this provides a weak resistance level. It is relatively easy for a rally to break this resistance feature and develop into a longer-term uptrend. To do this, the index must first be able to rally above the short-term downtrend line that forms the upper edge of the down-sloping triangle. This breakout would send a string bullish signal.
The key in deciding how the balance of probability will shift is the success or failure of support near 2,840. If this support level continues to be successful, then it will provide a firm base for the development of a new uptrend. However, if this critical support level fails, then the downside target is around 2,690.
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.
