Something interesting is happening in China.
Financial stocks are surging relative to the broad market. The “hockey stick” liftoff began in late November when the People’s Bank of China (PBOC) cut policy rates for the first time since 2012. China is the world’s only large economy with room to pursue conventional monetary policy. Further rate cuts are likely as falling energy costs put downward pressure on consumer prices.
Investors should keep close watch on FXI, the most liquid China-equity ETF. If our interest-rate thesis is correct, this bellwether index might soon break out from a three-year-old ascending triangle formation, generating an initial price objective of $56/share. The conditions for a new bull market – attractive valuations plus monetary stimulus – seem to be falling into place. A technical breakout, however, is needed to confirm it.
The attached seven charts outline the potentially bullish case. Note: FXI is similar in structure to the MSCI China Index referenced in figures 4-6.
Every investor dreams of identifying cheap or reasonably-priced securities in the early stages of a bull market. Chinese equities may soon meet both criteria. Valuations are historically attractive, but a technical breakout has yet to confirm a new bull market.
Asset allocators should prepare their mindsets for such an event. The prospect of further rate cuts from the PBOC is a likely catalyst.