Understanding the investment cycles of Asian markets

As Australia becomes more aligned to its biggest trading partner Asia, Dale Gillham takes a look at Chinese and Hong Kong markets – and what the next 12 months holds for Asian equities.

Every day in the morning news we are told about what is happening in the US markets, as if the US market is the barometer of what we can expect on our market.

While I accept that the US market can influence world markets, its statistical correlation to our market is approximately 60 per cent, and I would argue Australia has a similar correlation to other world markets.

That said, we are becoming more aligned to Asia, a region critical to the future of our economy. What is important to understand is that Asian share markets do not necessarily run in harmony with western markets, but rather have their own unique timing. 

Economically, our most important partner is China, which will continue to have a big impact on the Australian economy and share market. So it’s wise for us to look at what’s in store for their market. In the graph I take a technical view of the Shanghai Composite Index (SSEC).

As you can see, the SSEC has a regular movement from low-to-low of around 40 months.

Currently, the SSEC has unfolded over 35 months since the last major low in October 2008, with the last 26 of those 35 months since August 2009 being bearish. This equates to a massive 75 per cent of the past 35 months as bearish.

This movement in the SSEC is vastly different from both our market and the Dow, and suggests that more bearish times are to come. If the SSEC continues to repeat the 40-month cycle, then we can expect a low to form approximately 40 months after October 2008, with the expectation for it to occur sometime in 2012.

While not labelled on my chart, it can quite easily be seen that the SSEC has so far failed to rise back up half of the distance it fell from its high in October 2007 to its low in October 2008. Again this is a bearish sign and not too dissimilar to what has occurred on our market.

Given all this, the probability suggests the SSEC is bearish.

As such I have a target for price falls into 2012, which is that the SSEC will move down to between 1770 points and 1250 points. It is possible it could fall further; however the positive thing is that the move is likely to be quick.

After the low occurs I would expect a long-term sustainable bull-run will start, and that will most likely take our market with it.

When looking at China we need to examine not just the SSEC but also the Hang Seng (HSI) in Hong Kong. 

The HSI picture is quite different from that of the SSEC, and this is partly due to the fact that we have much more history on the HSI.

For many years Hong Kong was under British and not Chinese rule and was subjected to different economic trading conditions.

What is evident here is Asian markets are more erratic, with much larger swings in price than western markets. A study of other Asian indices such as Malaysia, Indonesia, Vietnam and Singapore would further highlight this. 

The HSI has quite a different movement from low-to-low than the SSEC. It is closer to 60 months between major lows.

In fact the average of these movements is 62.5 months, and like all cycles we have a window in which they can arrive.

In the case of the HSI it is plus or minus 10.4 months, or in other words approximately 52 to 73 months between lows.

With the SSEC the timeframe is 42.5 months, with an allowable timeframe of between 35.5 to 49.5 months between lows. While the sample size is not large for either market, every major low within the allowable timeframe.

Whilst both the HSI and the SSEC made highs (October 2007) and lows (October 2008) during the GFC in sync, what has occurred since then has been different. The HSI has been far more bullish, and until this year it had unfolded more like the Dow Jones.

The HSI, unlike our market or the Dow, started falling earlier and has been bearish over the past 12 months, falling 35 per cent in price. That said, it does look more bullish than our market and the SSEC, but only time will tell if this remains the case. 

Two things bother me about the current fall – the length of time HSI has fallen, and the severity of the fall. In saying that, this current fall could be a repeat of the past.

For example, a mid-cycle fall occurred in the first two periods, with a reasonable fall also occurring in 2004, and in all cases the market turned to rise to new all-time highs.

Nevertheless I am slightly leaning to the HSI being bearish. This month the it has been bullish, and if it can maintain this bull-run then the upper level of my price target for 2012 is that it will rise to around 29,000 points before falling into its next low in 2013.

If the HSI fails to hold above the current level in the next few months then I believe it will generally fall away to around 11,900 points over the coming two years, interspersed with some bullish periods.

Dale Gillham is the executive director of Wealth Within.