There may be a divergence between the global economy’s slowdown and the performance of stocks. Stocks can build base formations, and strengthen even as economies tank, and this is materialising in ETFs that track selected indices in Hong Kong with Chinese stocks. Markets tend to overreact to lockdowns, pandemics, war and famine.
Beaten-down Chinese tech stocks could be the first to recover as lockdowns ease. Lion-OCBC Securities Hang Seng Tech ETF (HST) , which is priced in Singapore dollars, has built a base with the neckline at around 78 cents. In addition, the HST has just risen above its 100-day moving average at 79 cents. The simultaneous breakout above the neckline and 100-day moving average, coupled with rising quarterly momentum and smoothed RSI, indicates an upside of almost $1. This target is achievable given that HST started trading at around $1.36 when it first listed in December 2020. HST tracks the Hang Seng Tech Index which in turn tracks the 30 largest tech-themed stocks listed in Hong Kong, many of them Chinese.
Xtrackers MSCI China UCITS ETF (TID), also priced in Singapore dollars, has yet to break above the neckline of a base formation at $23.33. TID had earlier broken above $21.7, a level which coincided with a resistance, a pattern breakout and the declining 50-day moving average. Now, a break above $23.33 indicates an upside of around $28. Supports should be kept tight, at $23, the level of the neckline. TID tracks the MSCI China Index which includes several mega tech-related stocks and China’s banking giants.
On the economic front, sentiment remains poor. On June 7, the World Bank warned of dire consequences if the Russo-Ukraine war is prolonged. The World Bank’s latest Global Economic Prospects report says the Russian invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation. “This raises the risk of stagflation, with potentially harmful consequences for middle- and low-income economies alike,” the report says.
According to the report, the current juncture resembles the 1970s in three key aspects: persistent supply-side disturbances fuelling inflation, preceded by a protracted period of highly accommodative monetary policy in major advanced economies, prospects for weakening growth, and vulnerabilities that emerging market and developing economies face with respect to the monetary policy tightening.
Interestingly, in the 1970s, it was the oil cartel Opec that raised energy prices in response to the Yom Kippur War.
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Today, Russia is attempting to do likewise, but at a time when the global economy is taking steps to turn away from fossil fuels, Russia’s main export. In addition, by pausing the export of grain, Russia is raising food prices.
“The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid,” warns World Bank president David Malpass. “Markets look forward, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality.”
Unlike the 1970s though, the dollar is strong, a sharp contrast with its severe weakness in the 1970s; the percentage increases in commodity prices are smaller; and the balance sheets of major financial institutions are generally strong. In addition, central banks are on the ball, and are taking steps to rein in inflation before it becomes endemic.
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