Emerging Global Markets Theme for Q3 2022: Easing Inflation Expectations Offer Rebound Relief in Stocks and Bonds (Part 3)

Jhis article is written by CMC APAC market analysts; Kelvin Wong, Tina Teng, Azeem Sheriff and Leon Li

The medium-term bullish trend of the Chinese stock market remains intact but risks falling in the short term

Since March 2022, the SSE Composite Index has suffered a sharp decline due to strict Covid lockdown measures which hit a low of 2863.64 on the 27the April. Subsequently, it rebounded for two consecutive months, which resisted the downward trend of stock markets in other developed countries. The reasons for the rebound can be explained below:

  • The epidemic peaked in April and the number of new Covid cases fell sharply in May, triggering a positive feedback loop in the Chinese stock market in anticipation of an easing of restrictive measures. Eventually, the Chinese government lifted most of the strict lockdown measures previously imposed in June.
  • The central government and China’s central bank, the PBOC, have implemented several accommodative policies to support an economic recovery. The government has introduced a series of measures to stabilize the real estate market, such as reducing the down payment rate, lifting the purchase restriction and granting housing subsidies. In addition, the PBOC has implemented a further reduction in the Prime Lending Rate (LPR) to expand the scale of social finance and boost business and resident confidence, thereby stabilizing employment and expanding domestic demand.
  • Infrastructure, employment, real estate and manufacturing have improved to varying degrees. Infrastructure and manufacturing are key drivers of an economic recovery in China. In June, the official manufacturing PMI hit 50.2% and social finance rose 2.79 trillion yuan in May, far exceeding market expectations of 2.37 trillion yuan. In addition, social finance is expected to increase further in June under the growing scale of corporate output and money supply (M2) is expected to increase by more than 10% year-on-year in June.

SSE composite index outlook for the third quarter

(click to enlarge table)

Source: TradingView as of July 7, 2022

  • The weekly chart showed that the SSE Composite Index has been swinging in a volatile major uptrend structure since 2013 which has continued to find support at a major uptrend line in place since July 2005 where such a positive scenario is likely to occur. continue under the likelihood of potentially more accommodative fiscal and monetary policies.
  • Additionally, the weekly MACD indicator, a gauge that measures changes in trend direction, showed a clear golden cross signal that suggests a potential medium to long-term rebound scenario in the third quarter.

SSE composite index, daily

(click to enlarge table) (click to enlarge table)

Source: TradingView as of July 7, 2022

  • SSE Composite’s price action has risen continuously since May 2022 without any significant pullback and since the first week of July 200 it has begun to consolidate near the 250-day moving average which acts as intermediate resistance at 3,440 .
  • The prior increase in trading volume of the SSE Composite seen from May to mid-June 2022 began to moderate and contract towards the end of June, indicating that overall market participation has begun to decline and Current SSE price actions may lack the inertia to stage a potential higher pushup.
  • Additionally, the daily MACD trend indicator issued an earlier bearish divergence signal followed by a recent death cross on July 6, 2022.
  • The near-term support area should be seen between 3,400 and 3,300 and if price moves below 3,300, it could lead to a deeper corrective pullback towards the medium-term support at 3,160.
  • On the other hand, a clearing above 3,440 could see further acceleration towards 3,720 major range resistance in place since February 2021.
  • China is at the beginning of an economic recovery phase and monetary policy is likely to remain accommodative. The accommodative financial environment and low valuation will likely continue to attract foreign investment to A-shares.
  • The current recovery is mainly driven by the manufacturing sector and infrastructure spending via fiscal policies. With real estate investment growth still negative, consumer spending has remained lackluster due to a less rosy job market, and the risk of another outbreak remains on the horizon (recent rapid increases new Covid cases in Zhejiang and Anhui provinces). Therefore, supportive monetary and fiscal policies are likely to continue, which is likely to support the current medium-term uptrend seen in the Chinese stock market.

​Perspectives of Chinese sectors

CSI China New Energy Index Daily

(click to enlarge table)

China Photovoltaic Industry CSI Index, Daily

(click to enlarge table)

Source: TradingView as of July 7, 2022

The manufacturing industry that was most affected by the lockdown in Shanghai has recovered significantly. The photovoltaic (PV) industry index and the new energy index have rebounded significantly over the past two months, and the magnitude of their respective rallies has outpaced other sectors. Additionally, their price actions have broken above the 250-day moving average, indicating a bullish trend.

However, the recent rapid rise in the New Energy index now faces the risk of a short-term pullback, with the MACD trend indicator displaying a bearish divergence signal. Watch intermediate resistance at 4,450 for a potential pullback towards support at 4,100 before another potential upside move materializes towards next resistance at 4,800 in Q3.

Similar observations can also be seen in the photovoltaic (PV) industry index; at risk of a short-term pullback towards the 5,000 short-term support in the first leg. Thereafter, it could stage another potential move towards the 5,750 resistance.

CSI China real estate index, daily

(click to enlarge table)

Source: TradingView as of July 7, 2022

Real estate developments and domestic consumption were sluggish. Both real estate investment (-4%) and total retail sales of consumer goods (-1.5%) recorded negative year-on-year growth from January to May 2022. As a result, the central government will adopt more accommodative fiscal and monetary policies to boost domestic demand to achieve China’s goal of steady economic growth in 2022.

The housing index remained in a sideways range configuration despite a series of supportive policies. The lack of optimism can be attributed to two reasons; some real estate companies still face liquidity risk and lack of demand for housing from landlords, as housing prices are still relatively high. Therefore, the overall trend of the real estate index should oscillate sideways between 4,600 and 4,100.

CSI China Consumer Staples Index, Daily

(click to enlarge table)

Source: TradingView as of July 6, 2022

The consumer staples index has remained in a strong uptrend and recently its price action has broken above the 250-day moving average Investors can pay attention to Baijiu, appliances, electronics, and food and beverage stocks. A break above the 24,500 intermediate resistance could lead to a potential further rise towards the next resistance at 26,000 in the third quarter.

CSI China Infrastructure Index, Daily

(click to enlarge table)

Source: TradingView as of July 7, 2022

The infrastructure index is still trading at a relatively low level compared to other sectors, but its current medium-term uptrend since its low in May 2022 has remained stable and its valuation has not been overstretched . In the second half of the year, infrastructure investment in China is expected to increase further, which, in turn, may help reduce unemployment and achieve the growth target. stable economy.. Watch for the 1,400 resistance level for Q3.

CSI index of semiconductors and semiconductor equipment in China, daily

(click to enlarge table)

Source: TradingView as of July 7, 2022

The recent rebound seen in semiconductors is not strong in terms of magnitude compared to other outperforming sectors. The main reason is that these semiconductor chip makers are still in the production expansion stage, but the chip shortage has eased compared to last year and inventory has been overstocked.

In addition, the recent Covid-related containment measures have also led to a reduction in their order books. In addition, consumer demand for digital products, household appliances, power tools and other products has declined, which in turn has negatively affected the performance of the semiconductor industry. As a result, the recent rebound in the semiconductor and semiconductor equipment index has been relatively weak.

With the possible implementation of more accommodating policies in Q3, the consumption of home appliances will likely improve, which in turn could increase demand for semiconductor chips. Look at the resistance level of 7,300.

Click here to read part 1 and here for part 2