2H17 Outlook: An Idiot's Guide to China's Nifty-Fifty Run

Categories: General Market Analysis, Technical Analysis, Economics

Country or region: China

This research appears on WenXin's blog "Hong Hao China Strategy" on 9 June 2017.

Reference URL: http://mp.weixin.qq.com/s?__biz=MzAwMTAwMzcxMg==&mid=2650861950&idx=1&sn=77fe5f0d441f0fdccd2bec07263e93ef&chksm=811408d1b66381c79c95e1d5ea33d81d488d9566114e11aa8082613930750576f30eb4994935&mpshare=1&scene=5&srcid=0622Rf0NgzTIqrvuugaOjyJ6#rd


Risk appetite is running high, yet big caps are outperforming instead of small caps. And cyclical assets such as commodities and US financials have corrected significantly. It is perplexing. The new financial regulation in China alone cannot explain this global phenomenon. The market is increasingly challenging, as big caps are becoming crowded, while smaller caps are fraught with risks. 


Our research shows that big caps tend to outperform amid moderating growth, as it is now.  Ubiquitous expectation drove US funds into the Nifty-Fifty back in the 1970’s for growth, while now herding Chinese funds into A50 for risk sheltering. Besides earnings stability, visibility and industry dominance in an increasingly unpredictable environment, the A50 is also seen as a convenient instrument for market stabilization ops. As such, owning these big cap names indeed aligns one’s interest with higher market power.


But ubiquity also breeds extremism. Big caps’ relative return is approaching extreme, hinting at a technical rebound in small caps with lower highs – an opportunity to reduce positions. With growth in the US and China sets to moderate in the coming months, big caps will continue to outperform, and commodity’s bear market rally will continue to test traders’ skills. When buying, size is key. Yield curve will continue to flatten, and credit spread will widen further. Current elated sentiment in Hong Kong augurs for new highs ahead, and the final dash could be spectacular enough to make the early bears cry – till the winter sets in.  



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