There’s room to run in China A-Shares’ triple-breakout

TopdownCharts
01-22 08:28

First they said it was uninvestable.

Then it broke out —but they said it was still in a downtrend.

Now it’s broken that downtrend line.

And there are still several reasons to expect further upside.

Here’s why I’m bullish on Chinese stocks:

  • Strong Technicals: as alluded to, we’ve seen 3 key breakouts (through the 200-day average, through long-term overhead resistance, and through the down trendline joining the last two major peaks).

  • Stock/Bond Ratio: we’ve also seen a key breakout in an indicator almost no-one else watches; the Chinese stock/bond ratio (important risk-on signal).

  • Cheap Valuations: Chinese stocks are reasonable vs history, cheap vs peers, and cheap vs bonds (very high equity risk premium).

  • Macro Tailwinds: we’ve seen a steady drift lower in interest rates, incremental stimulus measures, and now a tentative upturn in the PMIs from quasi-recessionary levels.

  • Sentiment: we’re seeing strong retail participation (likely an element of rotation out of languishing property and overheated gold, into stocks), earnings revisions momentum indicators are surging from previous pessimism, and there’s still an air of skepticism among global investors.

So it’s a case of good price and flows momentum, scope for upside in valuations, macro updrafts, and a steady changing of minds as price moves sentiment.

All this adds up to a bullish picture with room to run. It’s also entirely consistent with the bullish outlook for commodities and emerging markets.

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