Monday, April 30, 2012

Green shoots in China?

In the past few weeks, the markets have shown concern that China may be on the verge of a hard landing. My reading of the charts indicate that those concerns are starting to recede and there may be signs of "green shoots" out of China. Bear in mind the following two caveats to my analysis:
  • "Green shoots" are fragile and can easily be trampled underfoot; and
  • "Green shoots" are indications of stabilization, not signs that a roaring bull market is about to begin.
First, a chart of the Shanghai Composite shows that the index has rallied through an intermediate term downtrend (solid line) and that market is in the process of a sideways consolidation. In fact, it could be argued that the Shanghai Composite is starting to form a wedge pattern (dotted lines). Depending on which way the pattern resolves itself, it could point to the future trajectory of Chinese growth.

China is an enormous consumer of commodities. In this post (see Time to take some risk off the table), I pointed to the dismal behavior of commodity sensitive currencies as a sign for caution. Now, commodity sensitive currencies such as the Australian Dollar has rallied through its downtrend. A period of sideways consolidation is likely at this point.

The Canadian Dollar, which is another commodity sensitive currency whose economy has greater leveraged to the American economy than the Australian economy, recently staged an upside breakout from a trading range.

Commodity prices are also showing a tender green shoot, though that one is far more fragile. The CRB Index below shows that commodity prices have staged an upside breakout from a short-term downtrend (solid line), but the longer intermediate term downtrend (dotted line) remains intact.

The liquidity weighted CRB Index is more heavily weighted towards the energy complex. A look at the equal-weighted CRB Index, called the Continuous Commodity Index or CCI, shows that the CCI has staged an upside breakout through the intermediate downtrend. The most likely scenario is that commodity prices undergo a period of sideways consolidation.

To be sure, these "green shoots" are early signs of recovery which can easily be trampled. The strength in commodity prices may be a false start, as Izzy at FT Alphaville pointed out that it could be just more inventory accumulation and not the result of actual physical demand.

Constructive on China
My current framework for the analysis of the global outlook is to examine the Three Axis of Growth, namely the United States, Europe and China. For now, I believe that the message of the markets from China has changed from bearish to a fragile stabilization. No doubt the aforementioned markets will retrace some of their gains, but chances are good that the risks of a hard landing are receding.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

1 comment:

keithpiccirillo said...

Fine chartology.
Chanos and Hendry on last listen are lined up somewhat the other way.
My spouse has just returned from China, so I too have "boots on the ground" and she really enjoyed herself. Somewhat telling is that many of the sites she visited looked like things were freshly planted and just would not "take root". She stayed at a very fine home one evening, considered a palace by Chinese standards and noticed it did not have a finished appearance. Small extrapolations, and analogies, but the pressure to keep people busy from street sweepers to policy makers, must be putting enormous pressure on central planners.