The Week In Hindsight, 04 August 2014

Chinese equities bucked the global trend last week and extended their earlier gains to close 4.55% higher for the period, bringing the index’s YTD return to just over 5%. Driving investor sentiment was over spill from the previous week’s trading, better US economic data and a continued rebound in Chinese manufacturing sector.

While CNY shares have shown little signs of slowing their advance, Trade Balance and CPI figures due later this week will, once again, test the resolve of investors. Current forecasts imply stable inflation at 2.3% and a shrinking trade surplus, likely driven by a rebound in exports.

All in all, the Chinese economy appears to be stabilising and investor confidence has improved over recent weeks. In addition to this, corporate earnings are higher (^17.9% Av) and many of the PMI’s indicate that key industries are  expanding, albeit at a lower than in the past..

Consequently, we would not be surprised if the rally in CNY shares persists for the time being. It is worthy of note that Barclays Capital forecast the SSE Composite Index as likely to be the best performing market this year (+17%).

Given that access to Chinese shares has traditionally been very difficult, it will be interesting to see the impact upon markets of Hong Kong and Shanghai’s mutual access agreement when it takes effect in October 2014. Should this prove to be a success then Chinese equities could outperform, even in the face of an economic slowdown, given the current compression of earnings multiples (historic lows) for mainland shares.