(Apr 9): The Chinese economy is recovering slowly after taking a massive hit. Much of the focus is on the recovery of the manufacturing and service industries. The traditional measures of economic activity have been closely monitored, with Purchasing Managers’ Index (PMI) readings showing the expected records lows.
Nestled within this flow of news are other sets of statistical information that point the way to investment opportunities outside of — but directly related to — China.
Last week, the Director-General of China’s National Food and Strategic Reserves Administration, Wang Hong, provided a briefing on the current state of China’s grain reserves. While there is no threat of famine, the briefing suggested there will be shortfalls in food supplies due to Covid-19 lockdown impacts of production unless imports are substantially increased.
The investment opportunity is in the details. In Tier 1, 2 and 3 cities, finished grain reserves are sufficient for 10–15 days’ national supply. The grain emergency processing capacity nationwide is slightly under 1 billion kg/day. This is enough to provide each person with a little more than half a kg per day.
China remains a major food-importing country. It is the world’s largest rice importer, representing 6.5% of the global total. India is the world’s largest rice exporter, representing 30% of the global total. If India were to halt rice exports or become unable to produce significant crops this year due to Covid-19, then much of the world faces the prospect of hunger.
The spread of Covid-19 and its impact on all levels of production have created significant points of vulnerability. Currently, Vietnam and Kazakhstan have halted grain export. It anticipated that soybeans will experience significant shortfalls as global supplies dwindle. Soybeans are most important as animal feed, particularly for pigs.
Wang also identified that the biggest threat to the global agricultural supply chain is if Africa were to be hit heavily by Covid-19. This “if” would appear to be more a matter of “when”, given Africa’s poor health infrastructure.
There are three ramifications flowing from this largely ignored briefing. First is the way an increase in grain exports will satisfy the political demands of the recently negotiated US-China Phase One trade deal.
The necessity to import more grain has made this appear as a virtuous fulfilment of the trade agreement conditions.
This is more of a plus than it may seem at first glance because the increasingly aggressive rhetoric from the US calling for the punishment of China as the source of Covid-19 can be placated to some degree by the apparent compliance with the trade deal conditions.
The second impact is the boost this gives to companies involved in soft commodity production of wheat, rice, soybeans and other grains and foodstuffs. At current depressed prices, this makes companies involved in the food production chain an attractive investment. American giant Archer Daniels Midland (ADM) is down 21% from its January peak. Wilmar has fallen 20% and Hong Kong-listed China Foods is down 16%.
Futures traders have quickly identified the third impact, which is increased price pressure of soft commodities. This is driven both by increased demand from China and a decline in supply with poorer harvests in countries like Australia.
PMI readings may provide a guide to industrial recovery, but it is the ability to feed the workers in the economy that underpins the sustainability of recovery.
Technical outlook for the Shanghai market
The uptrend line in the Shanghai Index recovery has been positioned with a second anchor point based on the low on April 2. This trend is an important feature for tracking the development of the emerging uptrend.
Full confirmation of the trend line placement comes with a retreat and rebound that uses the value of the trend line as a support level.
The slope of the current trend line is less steep compared to the rebound trend line that followed the strong fast fall on Feb 3. This first rebound rally trend was very steep and ultimately unsustainable. The gentler slope of the current trend line is usually associated with more stable and sustained uptrend behaviour.
This type of restrained rebound is consistent with the breakout trend pattern that makes the right-hand side of the W-recovery chart pattern.
This is also a pattern of behaviour that traders watch for in other indexes like the Dow. This double-bottom pattern development comes with a warning.
The double-bottom pattern in the Shanghai index is less than perfect because the two low points are separated by 28 index points. The first major low on Feb 4 was at 2,685.
The second major low on March 23 was at 2,657. However, the close of March 19 was at 2,702 and on March 24 it was 2,722. These closes bracketed the value of the first major low at 2,685, so this remains a strong example of a double bottom.
This pattern of behaviour is sometimes called a W-shaped recovery.
The first target for this pattern is a retest of the peak near 3,060. There are two major resistance features to overcome before the index can reach the 3,060 target level. The first is historical resistance created by the lower edge of the trading band near 2,850.
The second is the value of the resistance level near 2,980.
The index is moving steadily towards the first resistance feature near 2,850. The uptrend line is projected into the future and crosses this horizontal resistance level around April 30. If the trend line successfully acts as a support level, then this suggests the index could move above 2,850 before the end of April.
A third successful text of the trend line and the placement of a third anchor point will further confirm this bullish conclusion.
The volatility since February and the falls in March continue to distort the calculation of averages. Traders must wait for this impact to wash out of any indicator calculation that relies on averages. This includes indicators such as RSI, Stochastic, MACD and GMMA. These indicators are all currently giving unreliable signals.
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.
