Highlights over the week… India is suffering chunky 50% tariffs on exports to the US, but their stock market is holding reasonably steady, down a bit but nothing scary. This speaks to the considerable domestic support for their stock market, despite apparently waning confidence in President Modi.
France is in trouble again, with politics in turmoil as no one has the mandate to take the painful action to deal with their unsustainable government debt levels. The UK has a similar debt problem, it does have a government with a mandate to deal with it, but lacks effective leadership and workable ideas. The upshot is the question “who will call in the IMF first?”, with embarrassing echoes of the 1970s. Bizarrely, the French Finance Minister even highlighted this possibility, not great for investor confidence.
As the political mood darkened in the UK, there did appear to be a bit of a hit to investor confidence over the week, with the FTSE 100 down over 1%. But Germany and France were worse, down 1.5% and 3% respectively.
Brazil was the star, up nearly 5%, the US up 2%, and Chinese A shares moving solidly, up 2% (CSI 300 index). In commodities, uranium was the star with buying met by limited supply, and the gold price has been spurred higher, very close to new highs, by more Trump-generated confusion and Russia increasing the odds of war escalating in Europe. A decent benchmark for a broad range of commodities is the JPM Natural Resources fund, up over 2% in the week and 16% for the year.
I will return to our "What's Hot? What's Not?" monthly feature in a moment, but first I wanted to focus a little more on China as there was a fanfare of sorts this week as the Asian press spotted that the Chinese A share market, that’s dominated by domestic buyers, hit a decade high. It sounded exciting, but the reality is that there is very little excitement. Let’s dig a bit deeper, and then review the continuing opportunity.
It was notable in the last week that on a daily basis Chinese A shares were outperforming Chinese alternatives. A simple way to observe this is by comparing iShares China Large Cap with iShares MSCI China A, the former down 1% over the week and the latter up 3%. I can’t remember the last time I saw such a gap opening up. The difference over the last month is 10%.
This is significant because Chinese investors dominate the A shares market, and of these 70-80% are Chinese retail investors, with the balance being Chinese institutions – foreign investors account for only around 5%.
It gets more interesting, because I recall the crazy Chinese bubbles of 2015 and 2007, both of which were dominated by individual retail investors.
The Shanghai Composite exploded 420% in just 22 months to the peak in October 2007. It catapulted 150% in 12 months to the peak in June 2015. That’s average monthly growth of 19% and 12.5% respectively, which is very impressive. But you had to be smart, and not emotional, to get out intact, as they respectively fell 70% and 50% in less than 12 months after each peak.
You might not find this picture of a rollercoaster very attractive as an investment proposition. Yet the growth to date, up 40% since the September 2024 low, suggests that the uptrend has barely got going. The buying in this period has been dominated by Chinese institutions, not retail investors who remain relatively cautious. When the latter embrace this new bull market there is considerably more upside. A little technical analysis helps define this more precisely.
Since the peak in 2007 the Shanghai Composite has moved sideways in what is called a diagonal triangle. This went on for 17 years, and by 2024 it was a textbook example of a diagonal triangle ending, and a market which should be bought:
- Cheap
- Apparently “uninvestable” according to “expert” pundits
- Global investors hugely under-weight
- Strong and growing policy support
Again thinking in textbook terms, my guide is that the thrust upwards from the diagonal triangle will approximate the maximum depth of the diagonal. The implication is a rise of 3x from the low of 2700 last September, targeting a peak in excess of 8000, more than double where this index is today. As you saw from the 2007 and 2015 precedents, a rise of “just” 100% could unfold rapidly, particularly if retail investors turn to geared options, the sort which weren’t widely available in the monster bubble and mania of 2007.
I can be wrong on two counts:
- Too optimistic. The diagonal triangle is a figment of my vivid imagination, and China is about to implode. That is why you MUST have a stop-loss.
- Too pessimistic. The Chinese market bottomed in November 2009 and has since been building a formidable foundation for a bull market which will eclipse that of 2007.
We will see.
Moving on to “What’s Hot?”, the big fund winners were gold miners, gains edging towards 20%, with Japan and China some way back, though still up around 6%. The UK featured in the losers, a mix of gilt and small cap funds, both of which go to waning confidence in the political leadership. A single Indian fund was the worst, down 4.6%, but that feels modest in the context of Trump tariffs set at 50%.
Japan topped the winning sectors, closely followed by commodities (note the JPM reference above). China and US smaller companies were almost neck and neck, straddling 3.4% growth, with US smallers buoyed by the prospect of rate cuts – it will be interesting to see if this enthusiasm is maintained through to the end of the year. On the whole, a broad spectrum of sectors made progress.
Predictably, India was the worst sector, down 2.9%, and three of the sectors were UK-focussed, though the falls weren’t terrible.
Summer is more or less over. Autumn ahead. Nothing ever goes wrong then!