SINGAPORE (Apr 15): Where do I allocate my long-term investment capital to maximise growth? Globalisation offered many opportunities and a means to diversify risk. It made sense to allocate funds to US markets and to the fast-rising Chinese markets. I, like many others, allocated investment capital to companies that did business with China, to companies that depended on China production for their success, to Chinese companies that were moving into international markets and to companies that benefited from Chinese growth. Some may argue that many investors are overweight China and that is now potentially a problem.
The foundations of global investing are being undermined by an already ferocious strategic battle over technological supremacy between the US and China. The concerted “security” attacks on Huawei are just a small example of a spreading contest that many investors haven’t come to terms with yet.
This is no Cold War, and analysing the developing situation through this lens is not useful. This is not a repeat of the Cold War with the Soviet Union because even at its height, the Soviet Union could not lay claim to any significant economic clout. It was a military state that struggled to feed its own people. China is a global economic power and its attention is primarily focused on trade relationships.
The dispute between the US and China means the global technological integration of the past several decades is being deliberately disrupted for strategic reasons to maintain a techno-economic supremacy currently enjoyed by the US.
Huawei is one arm of this attack and disruption. Another is the ramping up of foreign investment laws that will slow down foreign investment in US companies. The US administration and Congress are determined to curb foreign access to its technology. It recently changed the so-called Committee on Foreign Investment in the US (CFIUS) rules to impose scrutiny on minority company owners with links to countries of concern, rather than just majority owners.
Another immediate result is that the Chinese owner of Grindr, Beijing Kunlun Tech, wants to sell the popular gay dating app because the CFIUS ruled that its ownership is a national security risk. This is not good news if you have Beijing Kunlun Tech in your investment basket, but it also begs the question: What is the level of sovereign risk in the US? Investors must reassess the outlook for Chinese companies that are listed on US stock exchanges.
Australia introduced similar changes to its Foreign Investment Review Board. Some states also introduced taxes and conditions that disadvantaged foreign investors. The result has been a stunning collapse in the Australian housing market which, in turn, has had an impact on what were previously considered to be long-term property and property services investments.
It is not just our China investment strategy that is at risk. President Donald Trump’s plans to impose billions in tariffs on the EU affects the stability of European investments. Collectively, these moves imply weaker global productivity and a slower potential rate of economic growth. The constant reduction in global growth estimates by the International Monetary Fund is confirmation.
Many of our investment strategies are built on increasingly shifting sands, so careful reassessment is required.
Technical outlook for the Shanghai market
The Shanghai Index rally has achieved the upside target of 3,210 and developed a consolidation pattern. A fast strong continuation of this uptrend has the next target near 3,410. This is a very fast strong trend and fast strong trends have a low probability of continuing uninterrupted. The primary risk in this market is a pullback to the underlying trend strength.
The immediate sharp trend is defined with the straight-edge trend line. This line has acted as a support feature, a resistance feature and again as a support feature. The Shanghai Index has oscillated around the value of the trend line.
The underlying trend is defined with the strength of trend support shown with the long-term group of moving averages in the Guppy Multiple Moving Average indicators. If the market develops a strong pullback, then it will be the value of the long-term GMMA that will provide long-term trend support. The long-term GMMA provides an indication of the way investors are thinking.
Currently, the long-term GMMA is widely separated. This is evidence of a strong and well-supported trend. Wide separation acts like an airbag in a car crash. As the index pulls back, the momentum of the fall is absorbed and slowed by the wide separation in the long-term GMMA. It shows investors are stepping into the market as buyers, so there is a high probability the market pullback will develop a rebound and uptrend continuation.
The danger signal is when the long-term GMMA compresses. This indicates investor indecision and a failure of investor support. Compression in the long-term GMMA is the key feature investors and traders will watch for in the future.
Currently, the index is conciliating after breaking above the 3,210 resistance level. Consolidation activity may include the index oscillating around the value of the uptrend line and using the 3,210 level as a support feature. Longer-term consolidation may result in a sideways trading band that moves the index value towards the value of the upper edge of the long-term GMMA.
Trend continuation is dependent upon the continuation of three bullish features.
The first is the trend support offered by the lower edge of the short-term group of averages in the GMMA indicator. The index is clustering around the upper edges of the short-term GMMA and this is evidence of very strong support for the trend.
The second bullish feature is the way the index is oscillating around the value of the uptrend line. The third is the continued strong separation in the long-term group of GMMA averages.
Traders remain alert for the development of end-of-uptrend patterns. For the Shanghai Index, the most reliable pattern is the head-and-shoulder pattern. Traders will also watch for relative strength index divergence patterns.
Daryl Guppy is an international financial technical analysis expert and special consultant to AxiCorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for more than a decade. Guppy appears regularly on CNBC Asia and is known as ‘The Chart Man’. He is a national board member of the Australia China Business Council.
