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Is China Showing a Structural Change?

PART:
1 2 3 4 5 6 7 8
Part 7
Is China Showing a Structural Change? PART 7 OF 8

Are Chinese Equities in Uncharted Waters?

Shanghai Composite Index performance

In the trailing year, the Shanghai Composite Index has risen 9.5% as of October 20, 2017. In that same period, the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA), which are major US indexes, have risen 20.3% and 28.4%, respectively. The PowerShares DB Commodity Tracking ETF (DBC), which tracks the commodity market, rose 2.2% in the past year. However, the dollar index (UUP) fell 4.7% in the same period.

Are Chinese Equities in Uncharted Waters?

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Are prices and earnings diverging?

The PE (price-to-earnings) multiple and the index level of the Shanghai Composite Index (FXI) both moved closer to their one-year highs in October 2017. The rise in the PE ratio could be due to the rise in the index level. In the trailing year, EPS (earnings per share) growth for the index has fallen 8.5%. The divergence in price and earnings could be alarming to investors. For the S&P 500 Index (SPY), the EPS index has risen ~3.0% in the last year.

Technical analysis

On October 20, 2017, the Shanghai Composite Index was 1.2% and 4.9% above its 50-day moving average and 200-day moving average, respectively. But its 50-day moving average was only 3.6% above its 200-day moving average. If the difference reverses, it could pose a threat for investors. In death cross, a short-term moving average moves below the long-term moving average. It’s considered bearish for the underlying security.

In the next part of this series, we’ll take a look at the performance of China’s yuan.

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