Sustained bull run seen for MSCI China A 50 Connect Index

THE MSCI China A50 Connect Index has jumped roughly 9.17 per cent since the start of 2023, fuelled by investor optimism over the re-opening of China’s economy as the government pivots away from its zero-Covid policy. We envision a sustained bull run for the MSCI China A50 Connect Index and expect it to trade range bound between 2,650 and 2,870 by the end of 2023.

Chinese New Year celebrations sans Covid-19 restrictions resumed fully for the first time in three years, since 2020. The Covid-19 situation seems to be in control, without any major outbreaks during the week-long holiday. The Chinese Centre for Disease Control and Prevention reported that the numbers of Covid-related deaths and severe cases at hospitals dropped by more than 70 per cent from its peak in early January this year. Nevertheless, it is still unclear how severe the Covid-19 situation is in China as the government has stopped universal testing and redefined Covid-19 mortality.

The lifting of restrictions led to a travel frenzy, with the National Immigration Administration reporting that cross-border trips jumped by 120.5 per cent year-on-year during the Chinese New Year holidays. According to the Ministry of Culture and Tourism, around 308 million people travelled for leisure during the week-long period, amounting to one-fifth of the population, reaching around 88.6 per cent of pre-pandemic levels.

Fundamentally, we believe consumer consumption will be the key catalyst to drive China’s economic rebound. The Ministry of Commerce stated that tourism revenue increased 30 per cent year-on-year, reaching around 73 per cent of 2019 levels. The retail and catering sectors were reported to have grown by 6.8 per cent year-on-year. At the recent State Council executive meeting chaired by Premier Li Keqiang, he vowed to “step up efforts to deliver on policies for expanding consumption”. Authorities have also recently eased some of their aggressive crackdowns on tech companies.

Additionally, the Chinese consumer economy is still healthy, with households sitting on the largest pool of savings in history due to strict Covid-19 policies. Data from the People’s Bank of China (PBOC) showed that renminbi (RMB) household deposits surged by a record RMB17.84 trillion (S$3.5 trillion) in 2022, up from RMB9.9 trillion in 2021. We expect consumers to deploy this pool of excess savings as they engage in “revenge spending” once the economy fully reopens. Consumer spending will be supported by relatively low inflation compared to the rest of the world, with China’s Consumer Price Index (CPI) rising by 1.8 per cent in December 2022, up from 1.6 per cent in the previous month, but still well below its official target of around 3 per cent.

At the same time, China’s manufacturing and services sectors expanded for the first time in four months in January 2023, with the Manufacturing Purchasing Manager’s Index (PMI) rising more than expected to 50.1 from 47.0 in the prior month. The Non-Manufacturing PMI also jumped from 41.6 to 54.4. Thus, in our view, we believe the worst is over and see room for further upside as the world’s second largest economy stages a strong recovery from Q1.

On a technical perspective, we maintain a bullish outlook on the MSCI China A50 Index as we expect the Chinese government to continue rolling out pro-growth policies to revive demand that was beaten down by years of Covid-19 lockdowns. With a retracement drawn from the December 2021 high and October 2022 bottom, we expect the index to breach near-term resistance at 0.500 Fibonacci level at around 2,400. If broken, we see the index heading further upwards to trade range bound between 2,650 and 2,870, by the end of 2023 due to two main reasons:

1. The index is currently trading above the 50-day moving average, which has crossed above the 100-day moving average, indicating bullish momentum.

2. The Moving Average Convergence Divergence (MACD) indicator is showing a bullish crossover signal as the MACD line is currently above the signal line and remains above zero. The MACD histogram is also in positive territory, signalling bullish momentum.

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In conclusion, we are bullish on the MSCI China A50 Connect Index as we expect travel and consumer consumption to continue driving economic growth. The combination of low-inflation, pro-growth policies, and excessive savings build-up in households should fuel revenge-spending as seen in many western economies. Supportive measures for the property market, de-regulation in tech, and accommodative monetary/fiscal policies should also facilitate the recovery. We expect China to do well in the face of a potential global slowdown, pushing the MSCI China A50 Connect Index to around 2,650-2,870 by the end of 2023.

The writer is investment analyst at Phillip Nova