Australia observed its Anzac (Australian and New Zealand Army Corps) Day of national remembrance for those fallen in war recently. Originally, it was also established as a day for remembering the importance of peace and the avoidance of war. This year’s commemoration, however, was marred by the Australian Defence Minister Peter Dutton telling Australia to prepare for war with China.
It was a call endorsed by the Australian Prime Minister Scott Morrison who, referring to the agreement between the Solomon Islands and China, declared that he will not allow a Chinese military base on Australia’s doorstep. Morrison also says Canberra would be in lockstep with Washington with their readiness for military intervention.
Why should Singapore investors worry about these internal political developments in Australia? Quite simply, these developments alter the investment landscape, not just for investments in Australia, but potentially for investment and business activity in the region. Australia has become a loose cannon adrift in a sea of already explosive tension and that increases investment risk in three ways.
The first impact is on previously safe investments in Australian companies which are heavily reliant on trade with China. The obvious examples are the iron ore and coal producers, but it also includes The a2 Milk Company and other consumer product providers.
For many Singaporeans, this was a safe way to tap into China growth with investments offering both capital gain and a steady flow of good dividends.
The war rhetoric from Dutton, supported by Prime Minister Morrison, is disrupting the business models of these companies. China is actively accelerating its search for replacement and substitute suppliers of iron ore and reducing its imports of Australian coal. Other companies sell products into China that are essentially consumer discretionary items and these are easily subject to bans and disruption.
See also: China tightens securities lending rule to support stock market
The second investment impact comes from the potential for Australia to drag the US into a broader economic war against China in response to the agreement signed by the Solomon Islands. National Security Council Coordinator for the Indo-Pacific Kurt Campbell has already described this as a red-line for the US and threatened a range of unspecified punishments should the Solomon Islands take the agreement further.
The least disastrous outcome is a series of economic and trade sanctions aimed at China. Unfortunately, this casts a wide net and will capture a broad range of companies involved in business in the Pacific and with China. The particular risk here is the total exclusion from the Swift (Society for Worldwide Interbank Financial Telecommunication) settlement system as sanctions applied in relation to company business with one country are applied to all the business undertaken by the company. A company banned from Swift participation is banned from all participation, not just that in relation to its business with a US sanctioned country. The most disastrous outcome is that Australia — through a continuation of ham-fisted actions — drags the US into a kinetic or shooting war with China in the South West Pacific.
Whilst we would like to think this is an unthinkable outcome, we need to take note of the ‘prepare for war’ rhetoric coming from Australian political leaders which is widely supported by a cabal of media commentators. We are not suggesting that investors should run for the hills, but nor can we dismiss the possible outcomes that just a few weeks ago, seemed unbelievable.
See also: Eight reasons why I am still in favour of China stocks
Technical outlook for the Shanghai market
The fall in the Shanghai Index has now exceeded the head and shoulder uptrend reversal pattern target. The downside target for this pattern was near 3,040. The pattern consists of a head, or peak, and two lower shoulders. The first left shoulder was formed around June 2021. The head, or peak, developed in September 2021. The right shoulder formed during December 2021. A neckline is plotted between the low points of the two shoulders. The distance between the neckline and the head peak is measured. This value is projected downwards to provide the downside target near 3040.
The market tested this level in March 2022. This was followed by a weak rebound that carried the market to near 3,260. However, this rebound rally failed after spending much of April oscillating around the lower 3,220 historical support level. The most recent fall moved quickly below the head and shoulder target level of 3,040. The monthly chart provides details of the next support level. This is a narrow support band. The upper level of the support band is near 2,620. This was tested in February 2016, and again in December 2018. The lower level of this support band is near 2,420. This was tested as a resistance level in the first months of 2012. Later, this level acted as a support level in January 2019. This narrow support band is not a welldefined support feature so investors will watch for evidence that this support band can be effective. Investors look for consolidation in this region and wait for evidence that a rally rebound can develop from this consolidation area. Any rally from this level meets resistance near 3,040 which is also the head and shoulder pattern downside target level.
The Guppy Multiple Moving Average (GMMA) indicator has turned very bearish. The long-term group of averages which indicate investor thinking show that investors remain very bearish. This is confirmed by the consistent wide separation in this group of averages. This group has accelerated its downward trend.
The short-term group of averages, indicative of the way traders are thinking, also remains in bear mode with no significant or sustainable compression that would indicate a weakening of bearish pressure. Instead, they have resumed their plunge and have widened the degree of separation between the three day and 15 day moving averages in this group. Both traders and investors are committed sellers in this environment.
The wide gap between the short-term and long-term group of moving averages shows a steady and consistent degree of separation. This also confirms the strength of the downtrend. These types of powerful sell-off usually take a long time to recover. The first step in recovery is the development of a consolidation pattern. This is where the index fall stops and stabilises with the market moving sideways in a tight trading band. This usually develops around historical support levels which is why the narrow trading band between 2,420 and 2,620 is significant.
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 two decades. 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. The writer owns China stock and index ETFs
