The Shanghai Composite is on the cusp of forming a base, according to David Sneddon and his team at Credit Suisse in London, and a recovering China will be the catalyst for a phase of emerging market outperformance.
Whilst global equity markets have rallied impressively following their October break higher, China has been sidelined, which in Sneddon’s view is the reason a broad-based emerging markets recovery has not yet happened, despite the positive improvements in risk appetite. The Credit Suisse team believes this may finally be about to change, with the Shanghai Composite on the cusp of completing a base and Copper, having completed a base in November, rallying strongly, often a strong indicator of improving global growth and cyclical recovery.
Sneddon points out that the Shanghai Composite has reached its highest level since September, with volume also picking up and this is seen as consistent with the completion of a right shoulder to a larger medium-term inverse head-and-shoulders base (see Chart). He thinks major resistance at 3043/48 from the highs of July and September will likely be cleared to confirm the pattern and turn the core trend higher.
Sneddon would then see initial resistance at 3077, the 61.8% retracement of the 2019 downtrend. Thereafter, he thinks resistance at 3119 and then 3153/58, the 78.6% retracement and neckline to the small April top, should be cleared with ease. Above these levels, the high for the year at 3288 and then the measured base objective at 3348, just above the 78.6% retracement of the entire 2018/2019 downtrend at 3342, will come into view.
China has been the “missing link” in the emerging markets recovery story according to Sneddon and his team and if the base can be confirmed they believe this may be the catalyst that finally leads to a phase of outperformance with respect to developed equity markets, something the Credit Suisse risk appetite indicators have already been pointing to.