Is the market’s newfound optimism in A-shares misplaced?
That’s a question that’s going to take center stage in the weeks ahead.
Mainland markets have been the global whipping boy in 2018 as trade jitters conspired with a decelerating economy to deep-six sentiment, despite multiple RRR cuts and regular promises of fiscal stimulus.
Late last week, things took a turn for better after a tweet from Donald Trump and subsequent reports that the U.S. President had instructed cabinet members to draft a trade truce sparked a rousing rally in both onshore and offshore equities.
On Friday, foreign investors bought a whopping CNY17.5 billion in Chinese shares through the Northbound link, doubling the previous day’s record and enough to offset the entirety of October’s net selling.
For the week, Northbound registered the largest weekly inflow on record at $5 billion.
One key consideration going forward is domestic consumption. On Monday, liquor maker Kweichow Moutai (a market darling) fell by the limit after posting earnings that disappointed investors. That was the latest sign that the Chinese consumer might be faltering at the worst possible time.
You can see when the bottom really started to fall out for the domestic consumption story in the following chart, which shows how consumer discretionary names started to diverge markedly from the broader onshore benchmark over the summer, when the trade war really started to heat up.
On Friday, amid the trade-related euphoria (and on the heels of still more stimulus hints), the consumer discretionary index recorded its best single-session gain since the beginning of the year.
That comes after the index fell a truly harrowing 13% in October, the worst month for mainland consumer discretionary shares since early 2016.
Is this a big deal? In a word: Yes.
“It’s the category that counts”, Goldman writes, in a note dated Thursday, adding that “at a broad level, consumption has slowed, be it in autos, staples or durables [and] recent earnings have exacerbated concerns with Moutai‘s volume miss implying slowing demand.” That said, the bank sees possible bright spots in some areas, such as foodservice and sportswear.
If domestic consumption decelerates meaningfully or simply falls off a cliff, it will mark a grievous blow to an economy that’s already laboring under the threat of export pressure exerted by the Trump administration’s tariffs.
Needless to say, Larry Kudlow’s Friday afternoon walk-back of the draft “truce” reports doesn’t bode particularly well for an extension of recent euphoria in Chinese shares.