Tomas Ragina
Introduction
After much delay, the Chinese government is finally opening up the economy once again, as it lifts what’s left of its COVID restrictions. This single development is a big deal for Chinese markets that have struggled to keep the gears moving under such conditions.
Chinese consumers can now take in a breath of fresh air (pun intended). People can now finally go about their business as usual and start spending again; a development that may see consumer-based stocks see an uptick as markets set up for a 2023 rebound.
If this is your first time reading a Hunting Alpha article using Technical Analysis, you may want to read this post, which explains how and why I read the charts the way I do, utilizing principles of Flow, Location and Trap.
Why I am bullish China in 2023
The iShares MSCI China ETF (NASDAQ:MCHI) consists of 642 stocks tracking the Chinese equity market. Here’s my read of this exchange-traded fund (“ETF”) vs the S&P 500 Index (SP500) and on a standalone basis:
Read of Relative Money Flow
MCHI vs SPX500 Technical Analysis (TradingView, Author’s Analysis)
The MCHI/S&P500 pair is showing a sharp reversal and a false downward breakout trap confirmation, highlighting a buying opportunity. The pair initially tested the monthly support back at the start of 2022, after which buyers came on board in droves, pushing the price towards the monthly resistance ceiling.
However, they failed in their attempt to break this resistance, prompting sellers to create a successful false breakout (trap). The MCHI vs. SPX500 pair is now set to retake this monthly resistance over the upcoming months. The false breakout has a substantial bullish trading volume, further confirm buy signals on this pair.
Read of Absolute Money Flow
MCHI Technical Analysis (TradingView, Author’s Analysis)
A bullish momentum and setup have also been confirmed on the standalone MCHI chart. As with the relative pair, the MCHI chart has elevated trading volume to back the buyers’ sentiment.
I see a window for a slight correction to the $47.04 monthly support, where buyers can refuel the bullish move to retest the $55.84 monthly resistance for a 19% gain buy opportunity.
MCHI ETF Composition
The Chinese stock market and the MCHI ETF have a high weigh towards B2C sectors:
MCHI ETF Sector Exposure (MCHI ETF Website, Author’s Analysis)
The Chinese stock market has a rather secular slant. Cyclical sector exposure is minimal as industrials, real estate, materials, energy and utilities only make up 17.3% of the overall index.
MCHI Top 5 Holdings (MCHI ETF Website, Author’s Analysis)
The top 5 names in MCHI are familiar giants; Tencent (OTCPK:TCEHY), Alibaba (BABA), Meituan (OTCPK:MPNGF), and JD.com, Inc. (JD).
As can be seen in the table above, these top 5 holdings in MCHI are also heavily B2C oriented. The top 4 companies are all consumer facing and together they make up more than 91% of the Top 5 holdings’ exposure.
Fundamental Drivers and Monitorables of MCHI
U.S. Regulatory Fight
Investors might be trooping back into the Chinese stock market soon because of the delisting risks faced by Chinese companies listed on the U.S. market. This is coming after the Public Company Accounting Oversight Board (PCAOB) in the U.S. gained full approval to audit and vet Chinese companies. As these Chinese companies would rather not have the U.S. regulator looking up their skirts, they may run back to the Chinese exchanges. Recent events prove this trend:
The United States-China Economic and Security Review Commission said on September 30 that there were 272 Chinese companies listed on US exchanges and that these stocks were worth $775 billion. With about 100 stocks, including giants such as Alibaba and Baidu (BIDU), planning to run back home to China, the MCHI index could enjoy some notable gains in the coming months with price increases across the board.
Consumer Confidence Scraping at All-Time Lows
Given the high concentration of MCHI to the consumer facing sectors, it is a good idea to track the Chinese Consumer Confidence index:
Chinese Consumer Confidence Index (Trading Economics)
The index has declined sharply in 2022 towards record low. It is possible that a mean-reversion recovery may follow over the next few months. This is a key monitorable for me.
Summary
Overall, I have a bullish outlook on the MCHI vs. SPX500 pair and the standalone MCHI ETF. For MCHI, I anticipate a slight drop in the immediate monthly support to allow me to maximize the outcome of the bullish spring. That said, I am already in MCHI buys as of yesterday (22 December 2022).
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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