Chinese equities: the potential for catching up is attractiveIntroduction: While the US equity market has rallied vertically since the beginning of April on the back of trade diplomacy, the S&P 500 is now not far from its all-time high and is once again expensive in terms of market valuation. From a diversification point of view, the Chinese equity market may appear to offer some advantages at present, both technically and fundamentally. In fact, it is nowhere near its all-time high, unlike the MSCI World stock market index, which has just reached its all-time high and could do with some breathing space in the short term.
The chart below shows the monthly Japanese candlesticks of the MSCI World stock market index.
1) The Chinese equity market is significantly cheaper than Wall Street in terms of valuation
With the upward rally in US equities since the beginning of April, the S&P 500 is close to regaining its January valuation level, which is high by historical standards.
Two valuation barometers are examined here: the Shiller PE and the Warren Buffet Indicator, the latter being the ratio of total market capitalization to GDP.
The first table below shows a column with the market capitalization/GDP ratio for the world's main stock markets. While Wall Street's market capitalization represents almost 200% of US GDP (a speculative bubble according to the Buffet indicator), this ratio is only 66% for the Chinese equity market, an equity market considered cheap according to this valuation statistic.
The following chart compares the PE Shiller of the S&P 500 with the PE Shiller of the CSI 300, the Shanghai Stock Exchange's flagship index. According to this valuation ratio, which is highly respected by the world's top financial institutions, the Chinese equity market is more than half as expensive as the US equity market.
2) China's monetary and fiscal policies are highly accommodating, providing support for the equity market.
In addition to attractive stock market valuations, the Chinese equity market is benefiting from the Central Bank of China's highly accommodating monetary policy, as well as a fiscal policy designed to stimulate the economy, investment and household consumption.
Ultimately, this translates into a marked upward trend in the money supply in China, a combination of fundamental factors that are acting in support of the Chinese equity market.
To illustrate this, below are charts showing the BPoC's regular rate cuts, as well as the upward trend in Chinese liquidity and public debt to support China's economic growth.
3) In terms of technical analysis, the potential for a bullish recovery is still strong on China's main stock indices
To conclude this new market view on TradingView (please subscribe to our account to be alerted in real time to our new market analyses), here are three graphical representations of the flagship stock indices of the Shenzhen and Shanghai stock exchanges.
For both stock indices, the market has rebounded in recent months from major historical support levels, and major resistance levels are still well above the current price level.
This market analysis would be called into question in the event of a breach of the major technical supports shown on the charts below.
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