(Mar 20): What does Covid-19 economic recovery look like and how does it impact on investment and capital flows?
These key questions may appear to be too early to ask for regional and Western countries where Covid-19 is currently overwhelming hospital systems, but the shape of the post-Covid-19 China economy tells us what is worth buying as Western markets slow their falls and begin a recovery process.
Almost all businesses were effectively closed down as the Covid-19 crisis peaked in China. A significant proportion of these businesses, across all sectors, will not reopen because they could not survive the evaporation of cash flow.
Governments helped survival in the Covid-19 lockdown phase by deploying fiscal support measures. These included the suspension of government fees and charges, tax payment deferrals and other government imposts. It also included pressure on banks and financial institutions to extend credit terms, so repayments of mortgages and loans were deferred or suspended without penalty.
After the peak of the Covid-19 crises passes, it is then appropriate to deliver stimulus packages that assist business to re-establish themselves and recover. These are not stimulus packages built around new infrastructure or public services projects like those that followed the GFC. Western companies anticipating a blowout in demands for steel and associated commodities are likely to be disappointed. China’s recovery will not help them in the same was as they were helped with China’s GFC recovery.
Covid-19 lockdowns stifled demand because people could not get out. Ecommerce is a great substitute for shopping, but it is not the same as the social shopping experience.
As much as people complain about lines in the supermarket after several weeks in lockdown, they came to miss the social interaction of the shopping experience.
Covid-19 has both boosted eCommerce and highlighted its limitations.
Post-Covid-19 stimulus is designed to help business recover quickly so they can fill existing pent-up demand.
This includes access to cheap credit for rebuilding. Colleagues now send me pictures of Spring blossoms in the gardens of the Summer Palace as people can again enjoy public places. China is now urging officials to dine out and shop to boost consumption. The impetus is to spend and to spend locally.
While the human toll has been
enormous, the toll on capital reserves has also been significant. First, it has eaten into the capital reserves of every business. Business continuity is the priority. Business capital that may have been put aside for potential investment, including international investment, is now directed to resuming and refinancing business that has been effectively closed for eight weeks. That capital is no longer available for overseas investment and business ventures.
In the first two months of 2020, retail sales were down 20.5% y-o-y after 8% growth in December. This is an area of recovery growth as demand follows a resumption of employment. Fixed-asset investment dropped 24.5% and property development investment fell 16.3%. These areas will recover slowly as capital is prioritised for business re-establishment. Value-added industrial output fell 13.5%. The capacity for recovery is good but those with export focus face bigger hurdles as Western economies reel from their lack preparedness for the Covid-19 impact.
Post-Covid-19 China business and investment opportunities are related to the strength of the Chinese consumer market rather than infrastructure.
Technical outlook for the Shanghai market
Despite earlier rally strength, the Shanghai index is not immuned
from the global impact of Covid-19 on markets. The destruction of global demand through an unwillingness to learn from the way China handled the Covid-19 Crisis has triggered a collapse in Western markets and this has caused the Shanghai Index to plunge towards recent support levels near 2,720.
This support level is identified by projecting the width of the longterm trading band downwards from 2,850. This is a technical support level and it is not confirmed with historical index activity. In this sense it is a new support level so investors wait for proof the level can be successful before the coming back into the market as buyers.
A new uptrend line was plotted prior to the recent market retreat.
The retreat and rebound behaviour enabled the placement of an up-trend line. The behaviour of the Shanghai index since making the February low of 2,783 was no longer characterised as a rally. It is now be defined with an uptrend line because there are three anchor point for the uptrend line.
A reliable trend line has three anchor points, each a created by a low following a clear retreat and rebound point. The low of these patterns is used as the anchor point for the trend line. The position of the trend line is plotted using the lows at 2,879 and 2,910. The line is projected to the left and intersects the index near 2,765.
The trend line is projected forward to the right in anticipation of acting as a support feature.
This support did not develop, and the index gapped below the trend line and continued to fall and test technical support near 2,720. The trend line remains an important chart feature because this now acts as a rising resistance level for any further rises.
This creates a current resistance level near 2,980. This is also the value of a long-term historical resistance level.
Any market rebound has two resistance features to overcome. The first is historical resistance created by the lower edge of the trading band near 2,850. The second is the combined value of the uptrend line and the resistance level near 2,980.
The value of the trend line resistance changes each day because the trend line is sloping upwards.
The large gap down in early February and the current substantial fall disrupt the calculation of averages so traders must wait for this impact to wash out of any indicator calculation that relies on averages. This includes RSI, Stochastic, MACD and GMMA which are 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.
