The consensus has egg on its face with respect to Chinese stocks. It wasn’t supposed to be this way. Entering this year, one of the big concerns—and the primary reason for China’s ugly multi-year bear market—was the country’s destiny with a “4-handle” on gross domestic product (GDP) growth.
Now, stocks are melting up, and the repricing is for mid-5% growth in Q2. During the 10% growth days, this would have devastated, but with the real estate implosion a well-known quantity, a “GDP fiver” is a relief. An impressive surge in Chinese stocks has taken hold.
Interestingly, China’s up-and-down moves have been greeted with indifference by regional rivals, namely India and Japan. The CliffsNotes: Over the last year, those two markets were rallying, flying really, while China was in freefall. Now that China is “on,” Indian and Japanese stocks are paying no attention. In the eyes of an asset allocator, this anti-correlation is manna from heaven, should it persist.
Consider the action in the Hang Seng Index of Hong Kong-listed equities. That Index’s last notable peak was July 31 of last year, at 20,011. The tumble was ugly; the low was 15,277 on January 16. Now look at Japan’s Nikkei 225. In that time, the Index ran higher, from 33,476 to 35,478.
Like Japan, India also doesn’t want to correlate with China. The country’s SENSEX Index put together a rally—and a strong one at that—from 66,527 to 73,128 in that July 31-to-January 16 window that saw Chinese equities tanking. The S&P 500 also ignored China; it went from 4,576 to 4,739 in that time.
Things started to turn around for China’s economic and business prospects a few months back. The country released its industrial production figures on Friday. Clocking in at 6.7% YoY growth in April, the report exceeded both the 5.4% expectation and the previous month’s 4.5% growth rate. Nothing is easy, though; the Street was thinking YoY retail sales would be 3.8%. Instead, growth was a moribund 2.3%, down from 3.1% the prior month.
Back to the market action, which has fascinated us because a chunk of WisdomTree’s business is in country and regional funds. Since January 16, Asian bourses have had a totally different vibe. The Hang Seng won’t stop running; it is up more than 4,000 points to 19,553, with the overwhelming bulk of those gains having occurred since the April lows around 16,000. The best word to describe the price action: vertical.
But the Nikkei hasn’t played along. Marching to the beat of its own drummer, the Index seems to be moving independently of China’s action, having touched an intraday peak of 41,087 in March. It has since settled in around 39,000. Similar action abounds in the SENSEX, which has spent the last three months chopping sideways. Meanwhile, and unfortunately for asset allocators, the S&P 500 has regained a positive correlation with the Hang Seng, having picked up more than 300 points to the current 5,300 in one month’s time.
Though Chinese and U.S. stocks may be moving in tandem once again, the same cannot be said for the interaction between China and the stocks of its regional neighbors. Though we cannot say how long it can last, the 2024 action has provided that Holy Grail of diversification: India and Japan “zigging” while China “zags.”
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