At Mechelany Advisors, one of our strength and differentiating factor is our ability to identify major turning points and readiness to put our head on the block and alert our readers on the opportunity to invest or divest of any asset class, market or individual stocks.
Our regular readers also know that we have been investing in China for nearly three decades.
Today, We are sending a very strong BUY signal on Chinese equities and recommend investors to get to their maximum permitted asset allocation, favouring Chinese H-Shares and US listed Chinese tech stocks.
News coming from China have been rocking the financial markets in the past few months, leading to significant bear markets in US-listed Chinese Tech Stocks or Hong-Kong-listed H-Shares, both segments privileged by foreign investors.
From the regulatory clampdown on technology and data collection, online education, gaming, casinos and Fintech, to the clampdown on cryptocurrencies, to the travails of the overheated real estate sector and the demise of Evergrande, managing money in China has been made complicated for foreign investors and some of them have lost a lot of money.
These testing times have also led foreign and global investors to liquidate holdings and reduce considerably their exposure to the Middle Kingdom, leaving these shares at absolute, relative and historical rock-bottom values.
All the indicators we follow are telling us that WE ARE BOTTOMING NOW !
A significant rally will unfold in the last quarter of 2021, as the PBOC injects liquidity in the system to counter the cyclical economic slowdown, and Chinese investors start re-orienting they savings from real estate towards equities.
The Evergrande saga is over… The markets have fully digested the magnitude and the consequences of the demise of Evergrande, and concluded that china will manage the crisis efficiently with limited collateral damage, without giving investors any kind of blank-check protection.
In fact, this will be the first real, and sizeable test of China’s ability to manage crises while maintaining the logic of free- markets and risk-taking.
Today, the Chinese real estate sector has clearly bottomed, and although we are not yet at stages where we could consider investing in this sector, the contagion effect from Evergrande is over.
Likewise, and after having made a significant double bottom, Chinese tech stocks listed in both Hong Kong and the US are turning and are skiing at extremely compelling valuations now.
Finally, all the major indexes are turning the corner delivering strong BUY signals.
For the Record, we are printing here the levels of the Major Indexes at the time of our ALL IN recommendation :
CSI 300 : 4’900
HSCEI : 8’750
GOLDEN DRAGON : 10’500
FT50 CHINA : 17’400
HSCEI Index. H-Shares listed in Hong Kong
The HSCEI started bottoming out in August 2021 with a double bottom and a breakout to the upside that was negated by the panic of the Evergrande situation. Now that this is out of the way, the index is bottoming again and trading in the last two days marks a significant trend reversal and exhaustion of the selling pressure.
On a Weekly Basis, the HSECI is bottoming out on a strong support that marked the bottom of the March 2020 bear market ..
And looking at the long term chart, this very same support has been the KEY Support of the index since 2006, 15 years ago.
The 30 % fall in the index since February 2021 has been driven by foreign investors liquidation, meaning that a major source of selling pressure has disappeared.
Conversely, at 7x prospective earnings, the HSCEI is trading at the lowest P/E ratio of all investable markets in the universe and its cheapest historically,
And on a comparative basis, the gap with the domestic CSI300 Index has never been that wide, with the HSCEI having delivered 65 % less than the CSI 300 Index.
Golden Dragon Index – ADRs listed in the US
The Golden Dragon Index lost 50 % of its value since February 2021 and has just completed its first double bottom, sending a very significant BUY Signal.
This double bottom is taking place at very important long term support and the MACD are forming an important BUY signal from extremely oversold levels with the differential about to move in positive, signalling a trend change.
This is the time or never to re-enter the Chinese technology sector with high growth and cheap valuations. Foreign Liquidation is over and many individual stocks are delivering strong BUY signals.
FT50 China Index
The FT50 Index of China’s Largest companies just recorded a significant triple bottom and a reversal was confirmed today.
As the weekly chart shows, the FT50 China is also trading on a very significant support that has held all the time in the past five years save for the March 2020 violent index-driven Sell off.
China’s largest domestic Index has been in consolidation mode for the past two months with a succession of higher lows despite all the volatility of the real estate sector.
We expect the index to break the downtrend in place since February very soon..
The CSI 300 is not our preferred index as the domestic market is more expensive that the H-shares index, but it will nevertheless benefit from more monetary stimulus and from a recovery in real estate stocks.
It is always extremely interesting to compare the behaviour of the indexes to the behaviour of individual stocks and sectors.
Tencent ( 700 HK )
The bellwether company of the Chinese technology sector, Tencent is a screaming BUY.
Tencent has lost 50 % of its value in the past 6 months and has now completed a full bottoming out formation with multiple bottoms and higher low. It is oil the verge of breaking back above its moving average.
ALI BABA ( BABA US )
The other Chinese tech mammoth has also lost 50 % of its value, is trading on a major support since 2017 and is more oversold than ever. As we have highlighted in previous articles, at current levels, the cony trades at more than a 100 % discount of fair value based on Disputed cash flow models.
NetEase ( 9999 HK )
Another screaming BUY in the tech universe with a completed bottoming out formation and upward acceleration now.
IQIYI ( IQ US )
The Darling Chinese tech stocks of Cathy Wood and Archegos’ Bill Hwang in February 2020 is now trading 70 % lower than where they were bullish and touted it on social medias… Either their analytical methodology is completely flawed when it comes to the future growth prospects of companies, or IQIYI is the STEAL of the century at this level.
The liquidation phenomenon has lost steam and we are making a marginally lower bottom meaning that a sharp move up is on the cards very soon on the breakout of the downward trend.
Hedge funds will run for cover as the short interest in IQIY is almost as high as it was in March 2021 at 55.2 million shares. Fasten you seat belts, the vertical acceleration will deliver several Gs.
What a nice Accumulation stock. Baidu trades at less than 50 % of its February 2021 value and has juts recorded an important reversal today. A break out above the moving averages will send the stock sharply higher.
TRIP.COM (TCOM US )
Let’s travel again… Trip.com, the Chinese online travel booking giant is coming back to life ahead of the Chinese October holiday. A screaming buy short term that we are adding today to our Model Portfolio.
Longer term, we have just completed the first significant succession of Higher Lows and a medium term reverse head and shoulder. This is a great time to play the Chinese travel recovery
We have been accumulating Chinese H-shares for months in our MODEL PORTFOLIO and sailed through the recent crises without significant damage thanks to our value approach and diversified risk structure …
But for global investors that are out of Chinese equities, this is the perfect moment to go “All-IN “
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