Half-Baked Idea: Chinese A-Shares

[Quick thing: OM changed the provider that sends these emails out, so hopefully you’re all receiving this.  I’d say holler if you’re not, but err…hopefully, the new ‘advanced’ software will let me know you’re not (or at least didn’t open this email) else this bit is all a bit moot!]

This is something OM has been pondering for a couple of months; though, he thought (and still thinks, even with the big move in A-Shares) that it would be a late 2019/early 2020 trade.  

This idea is all about pattern recognition, backed up by a collection of circumstantial evidence so it will always be a more speculative idea.  That doesn’t mean OM won’t take a position in it at some point, though it would likely be a 6-18mos trade and thus not a huge position.

The above is a long-term OEW technical chart of China.  If you look at the lows (05/06, 08/09, 13/14, and now 18/19….even back to 94/95) – all down 50%+ from prior peak.  All were followed by sharp rises in the following years.  If history is a guide, or at least could rhyme a little, this C-wave should last ~2years and if the last few bull markets are anything to go by, the IRR could be spectacular.  For comparison, post-06 the market was up 500% in ~2yrs, post-08/09 it more doubled in about a year, and after the 13/14 low it almost tripled by mid-2015.  In the case of both post-06 and after the 13/14 lows, the rally started off slowly before going exponential towards the end.

So the technical perspective is that we potentially saw a new major low at the end of 2018.  In the short term, MSCI’s recent announcement of mid-2019’s large increase in China’s weighting in the MSCI Emerging Market Index has helped the new bull market establish itself.

Given this good news, why does OM like the ~2 year time frame?  Well, he rather suspects it fits well with the Communist Party’s incentives.  Consider the following timeline:
- 2021 is the Centenary of the Communist Party of China's founding, marking the start of the “two centenary goals”*.  The goals were put down in writing at the 18th National Congress (in 2012) when Xi Jinping became leader.  Xi has subsequently linked them to the “Chinese dream”.
- 2022 sees the next National Congress where Xi likely to be the first leader to run for a 3rd term.

The Party has a strong incentive for China to go into those two events with a strong economy.  That means using 2019 to sort out some of China’s imbalances - and the trade dispute with the US provides great cover/excuse for this, whether there a deal or no deal!  This will prevent overheating when China stimulates and allows them to stimulate aggressively in 2020 to ensure a strong 2021-2022. 

So now you know the half-baked idea, expect an update if OM is putting it into the book.




*The other centenary is that of the founding of the People’s Republic of China in 2049.