Seasonality in China’s equity market is typical of most equity markets in the world. The Shanghai composite index tends to reach a seasonal low near the end of October and a seasonal high near the middle of May. The seasonal sweet spot, when most of the gains are recorded on a real and relative basis, is from mid-December to mid-April. According to EquityClock.com, average return per period during the past 20 periods was 9.03 per cent, outperforming the S&P 500 index by an average of 7.10 per cent. The trade has been profitable during 15 of the past 20 periods.
On the charts, the Shanghai composite index is showing signs of entering its sweet spot earlier than average. The index is in an intermediate uptrend, it recently moved above its 20, 50 and 200 day averages, and it began to outperform the S&P 500 index three weeks ago. On Tuesday, the index broke above a long term downtrend and moved above medium term resistance at 2,243. A move above next resistance at 2,270 will attract technical buying.
Why is the index moving higher now? Last Monday, the November HSBC China Flash Purchasing Managers Index offered a clue. The index recorded a print of 50.8, beating analyst estimates calling for 50.5 and suggesting growth in the Chinese economy. The Baltic Dry Index, a gauge of what it costs to ship raw materials by sea, including to and from China, recently broke out of a 20-month range, moving back to levels last seen in October of 2011. Gains in the Baltic Dry Index are typically a sign of global economic strength, particularly in the area of manufacturing. China is poised to benefit.
Accumulation of Chinese equity ETFs at current or lower prices by mid-December is preferred. Investors have a wide variety of ways to invest in China with exchange-traded funds. U.S. exchanges list 18 funds. The most actively traded fund is iShares FTSE China Large-Cap ETF (FXI). In Canada, iShares offers two funds: China All-Cap Index Fund (CHI) with a management expense ratio of 0.70 per cent and China Index Fund (XCH) with a management expense ratio of 0.85 per cent.
Don and Jon Vialoux are the authors of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. They are also research analysts at Horizons Investment Management, offering research for the Horizons Seasonal Rotation ETF (HAC-T). All of the views expressed herein are their personal views, although they may be reflected in positions or transactions in the various funds managed by Horizons Investment. Horizons Investment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://TimingTheMarket.ca/ and http://EquityClock.com.