Lucky numbers

A bullish start to the year

For a number of millennia, alchemists attempted the impossible feat of turning lead into gold. Likewise, in the past week Chinese newspapers have been trumpeting similarly magical forces at work across the country’s equity markets.

“A-shares have been training to use nine-yang magic,” exclaimed the headline on Sohu.

For those who are a bit lost by this type of stock commentary: nine is one of the most propitious numbers in China and is associated with the everlasting. When combined with masculine yang energy, it is viewed as a vibrant, unstoppable force.

And by January 11, the CSI Index had recorded gains for nine consecutive days. As WiC has written many times before, numerology has long played an important role in Chinese culture and thinking.

The last time the CSI 300 achieved a “nine-yang” moment was early in 2015, shortly before the index shot up into the stratosphere. This did not prove to be very propitious, or long lasting either. Those retail investors who came late to the rally got badly hurt after the index crashed and lost a third of its value in the space of a month (see WiC288).

The Chinese media are wondering then if another number might blight this year’s rally too. As Sohu points out the number ‘8’ is traditionally associated with fortune but in recent decades its track record has been anything but good, given the Asian financial crisis in 1998 (ending in an eight) and we can all remember the carnage of the global credit crisis in 2008.

Wallstreet.cn believes, mind you, that it is “different this time”. Whereas China’s last bull run was rapid and driven by small caps, it notes that the current one has been more gradual and is being propelled by blue chips.

Indeed, analysts are almost unanimously optimistic about the market’s prospects for at least the first half of 2018. Their immensely upbeat pieces are a strong reason why both Hong Kong and Chinese stocks have set off to such a strong start this month.

On Thursday, Hong Kong’s Hang Seng Index (which has a heavy weighting towards mainland Chinese stocks) closed at 32,121, beating its record close in October 2007. At more than 13 times forward earnings, the index is trading at more than 5% above its five-year average.

And since Greater China equity markets are still playing catch up with developed countries, many analysts believe they have further to run. Both the Dow Jones and S&P 500 hit record highs last November and have climbed a further 7% to 7.5% since then.

The Greater China universe has lagged other parts of the world, in part because of the 2015 crash and in part because of fears of a (yet to materialise) Chinese hard landing.

Other factors at play: equities tend to benefit during the early part of an interest rate cycle; and analysts have also been pointing out that corporate earnings are rebounding across Greater China.

The investment programmes connecting Hong Kong’s stock market with investors in Shanghai and Shenzhen are further expected to underpin Hong Kong equities. Investment from mainland China now accounts for 16% of the territory’s average daily turnover and amounted to Rmb382 billion ($59.29 billion) over the course of 2017.

Many analysts believe inflows will continue to grow strongly in 2018, as bigger institutional investors rotate money to Hong Kong. Investment by mainland insurers, for example, jumped from Rmb54 billion in 2016 to Rmb199 billion in 2017.

The data from Hong Kong continues to flag bullish sentiment. This month saw the HSI enjoy a record streak of 14 consecutive trading session of gains, broken only on Monday – and even after that day’s sell-off, the index rose again on Tuesday, Wednesday and Thursday. Yesterday the intra-day high was finally breached too meaning the HSI hit a new intra-day peak of 32,233.

However, if the current bout of momentum trading looks alluring, there is a warning from those who have seen such things before. With Chinese New Year approaching in mid-February there may be a tendency by mainland speculators to take profit and repatriate cash – causing a sharp correction. That said, in the weeks leading up to that key date on the Chinese calendar there may be a whole series of new HSI highs to report on.

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