Asia Session: What’s Next for Chinese Stocks?

Investors in Asia were more than happy to feed off the positive data flow out of Europe overnight, given the lack of market moving events during Asian trading hours. As a result, most equity markets in the region managed to hold in the green and the FX market returned to yesterday’s theme of tight range bound trading.

The biggest gainer in equities is the JPN 225 which is up around 1.1% at the time of writing, with the index being led by the basic materials and consumer goods sectors. The Japanese equity market is lagging behind other major stock markets in Asia for the first part of 2012, as it continues to be hampered by a high yen and yesterday’s trade data highlighted the impact that the European crisis is having on the economy. Exports in Japan are suffering due to decreasing levels of global demand and imports are feeling the indirect effect of the European debt crisis, as companies struggle with weak levels of domestic demand for foreign goods.

Yesterday’s Chinese inflation data failed to spur another rally in the Shanghai Composite, yet the index is still up by around 4% for the week, after falling around 65% from its highs in 2007. In China over the last few years investors have poured out of equities and into the property market, causing the current bubble in property prices. So, given the slowing flow of funds into property, where are investors going to allocate their capital now? It is not beyond the realm of possibility that they will head back into equities, given that Chinese shares are relatively cheap when compared with other markets, but that is not our concern. We would advise caution before leaping into Chinese stocks due to the fact that prices tend to be more determined by speculation and the government’s policy moves rather than by fundamentals.

Nevertheless, if policy moves are in the right direction it could be beneficial for stocks in China and might even lead to a substantial rally. Can we see this happening? During the second half of this year we think that the government might entertain the idea of policy easing, but not before then. Beijing seems fairly content at the moment to sit back and watch inflation sink more before they enact measures to stimulate growth.

US oil spent most of the session clawing its way back towards 100.00, following the sell-off overnight which saw it sink from above 102.00 to momentarily below 99.00. The sell-off was trigged by rumours that Europe would delay and embargo on Iranian oil.

The aussie had a fairly uneventful session but it momentarily tested a key support level around 1.0300, before a bounce-back to around 1.0320. Beyond this level we would look for a break of the overnight low around 1.0283 to suggest some more downside risk.