Could the Shanghai Index Outperform the Dow Jones?

  • The Shanghai Composite Index surged 1.2% today after a Caixin/Markit survey showed continued expansion in China’s manufacturing activity. While the reading missed estimates, it was, nonetheless, above 50. China’s official PMI, released earlier this week, also showed expansion.
  • Last year, the Shanghai Composite underperformed the S&P 500. Could Chinese stocks outperform US stocks in 2020?

Today, Caixin/Markit released China’s December manufacturing PMI data. The PMI stood at 51.5, down from 51.8 in November. It also missed analysts’ estimate. Meanwhile, the official PMI, released earlier this week, was better than expected. Both surveys show China’s manufacturing activity increased in December. The Shanghai Composite surged 1.2% today after the PMI release.

Shanghai Composite Index versus Dow Jones

Last year, the Shanghai Composite gained 22.3%, while the Hang Seng rose 9.1%. The Hong Kong protests impacted the Hang Seng last year. The Shanghai Composite had its best year since 2014. In the US, the S&P 500 (SPY) rose almost 29% in 2019 and had its best year since 2013. The Dow Jones (DIA) also rose, by 22%. Meanwhile, after a strong 2019, most analysts don’t see large returns for US stock markets this year. Read S&P 500 at Record Highs: Not Much Upside in 2020 for more insights.

Chinese stocks versus US stocks

Phase one of a US-China trade deal is expected to be signed shortly. As part of the deal, the US has eased some tariffs on Chinese imports. China’s exports to the US tumbled in the second half of 2019 on punitive tariffs. The trade war’s escalation also took a toll on the Shanghai Composite last year.

The easing of tariffs could help China increase its exports to the US and boost market sentiment. With the Caixin/Markit December manufacturing PMI release, CEBM Group director of macroeconomic analysis Dr. Zhengsheng Zhong noted, “China’s manufacturing economy continued to stabilize in December, although the expansion in demand was not as strong as the previous two months. Positive changes included improved business confidence, and strengthened willingness to increase production and inventories, which are beneficial to the job market.”

Several signs of bottoming out in the Chinese economy

Over the last couple of months, several indicators have shown signs of the Chinese economy bottoming out. These signs, coupled with optimism over phase one of a US-China trade deal, lifted the Shanghai Composite in November and December. Furthermore, the People’s Bank of China looks amenable to more easing, and lowered reserve requirements for banks yesterday in a bid to shore up liquidity. On the other hand, the US Fed may not consider any easing soon. Last year, the Fed lowered rates by 75 basis points through three rate cuts of 25 basis points each.

Could the Shanghai Index outperform the Dow Jones in 2020?

Given the political uncertainty amid Trump’s impeachment and the upcoming presidential election, US markets could see some volatility. Plus, US stock markets aren’t looking compelling from a valuation standpoint. A lot has to go right for US stock markets this year for the momentum to continue. If China’s economy continues to strengthen, the Shanghai Composite might outperform US-listed stocks this year.

Meanwhile, while bears lost the plot in 2019, some economists are predicting a US stock market crash in 2020. For more insights, read Is a US Stock Market Crash Coming in 2020?