Some quarters of the investing world see potential in the moribund Chinese equities market. According to Bloomberg, the risk premium of Chinese stocks has reached a level that historically leads to spectacular returns.
“China’s stock market is sinking to the bottom of the global ranking in the first week of 2024 trading. From its peak in 2021, the CSI 300 Index has lost about 42%, comparable to the drawdown during the burst of the stock bubble in 2015.
“In contrast, China’s bond market has extended its rally, sending the yield on 10-year notes to 2.5%, the lowest since April 2020. Both markets are telling the same story about the macro weakness in China,” the Bloomberg story says.
At current levels, the earnings yield of the Chinese market is 8%, which is 5.7 percentage points above China’s risk-free rate. “Since 2005, the gap has rarely been this big,” Bloomberg says. At this yield spread, equities usually rally. Whether history repeats itself remains to be seen.
The Straits Times index fell below the still declining 200-day index, currently at 3,200, a sign that the market is a tad weaker than it should be at this stage of the corrective move. Week-on-week, the STI lost 56 points to end at 3,184.
Despite this, the rally by the STI following its breakout above 3,150 has not run its course. The retreat during the week of Jan 2-5 took the index to an intra-day low of 3,159, where it found support on the still declining 100-day moving average, although prices fell below the 200-day moving average at 3,201.
See also: STI’s upside from breakout remains valid as risk-free rates fade, but stay watchful for FOMC
The break above 3,150 and subsequently 3,190 during December 2023 indicates an upside of around 3,330 and this remains valid. Resistance appears at 3,380. This leaves upside on the table for the market.
In the meantime, US equities may remain volatile, albeit termporaily. Yields on the 10-year US treasuries have continued to rebound, ending at 4.01% as at Jan 5. This level coincides with the breahced 200-day moving average which should provide resistance.
Elsewhere, OCBC Credit Research points out that financial institutions and banks should remain operationally stable despite a potential cut in interest rates. “We expect stable fundamentals for the Financial Institutions under our coverage as higher interest rates and benign credit quality should support earnings performance while credit ratios remain comfortably above minimum requirements,” OCBC Credit Research says.
According OCBC Credit Research, the risk is for a non-call of bank capital instruments has increased. Although CapitaLand Ascott Trust HMN , Mapletree Logistics Trust M44U and Lippo Mall Indonesia Retail Trust have not redeemed their perpetual securities, if banks failed to call, eyebrows would be raised.
