Chart 1 & 2: Are Chinese stocks reversing roles with US counterparts?
In the recent post titled “Global Stock Markets“, I hinted at the large discreptancy in absolute, as well as relative valuations, between various global stock markets. The crux of the post focused on the overvaluation in United States, a stalling bull run in Europe and under-valuation in China (and its neighbours like Korea and Hong Kong).
Fast forward a couple of weeks later and an interest inflection point could be in front of us. Even though the recent price movements are short term orientated, it seems that Chinese equities are now breaking out on the upside. Only a couple of weeks ago I wrote:
When discussing risks in the global economy and macro investments, majority of the fund managers agree that China is the biggest worry and one majority lose sleep over. The bearishness has actually been intensifying over the last few years, and yet the Chinese stock market has actually failed to fall lower. Volatility has completely died out in 2014 and it seems a big move is coming soon.
The truth is, Chinese mainland stock market is incredibly oversold. After peaking in 2007 at around 6000 points, the index finds itself 66% lower 7 long years later. Furthermore, since 2009, Shanghai Composite has failed to stage a multi-quarter rally. Constantly bombard by bad news and a sideways trending market, investors have surely forgotten that Chinese stocks can actually go up, too.
Simultaneously, the US and EU stock markets seems to be entering a corrective period. While the bulls admit that a several percentage pullback would be healthy for the S&P 500, super bears claim that this is a start of a new bear market. Even if this isn’t a major peak for US equities, I personally think that the mainland Chinese equities will outperform US counterparts from here onwards. Chart 3 clearly shows that we have a potential reversal in this multi-year trend. Therefore, a wise trader could long Chinese equities while shorting US equities.
Chart 3: Even if US stocks hold up, Chinese stocks should outperform!
