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Chinese Equity: New Global Leadership

Jeremy Fehr

Chinese Equity: New Global Leadership

Snapshot 
Global stock markets have been in a state of turmoil from the Covid-19 health crisis, and subsequent economic fallout. In negative markets, we often find new leadership during carnage. Chinese Equity is showing its strength.

Details
BMO China Equity Index ETF (Ticker: ZCH)

Benefits
With equities showing their highest risk in over 10 years, identifying new leadership plays a key role in portfolio construction for the other side of the Bear Market.

Trade Idea – New Global Leadership
It comes as no surprise to most that China stands as a global leader on an economic basis.  This leadership though, has largely taken a back seat in its equity strength vs. strong western markets such as the United States. Over the past 10 years, China has lagged the S&P 500 on a relative strength, and absolute, basis – with equity performance that although positive, has not brought investors the same level of return as its competition in the West. That underperformance changed in the last quarter of 2019 and has accelerated during the Covid-19 crisis. At first thought, this may not make sense since the virus originated in China; they saw tremendous casualties from the virus; and in some centres of influence, are being blamed for the global repercussions.  The other side of that coin though is China has possibly seen the worst of the crisis based on reported numbers; they were able to enact sweeping and severe citizen isolation policies in a short period of time; they were able to ramp up medical services in the form of new hospitals and medical supplies, and finally, the country is getting back to work just as the worst of the Covid-19 crisis hits the West.

BMO-CHINA-EQUITY_English-version.jpg#asset:4053

Source: siacharts.com, as of March 24, 2020.

The chart on ZCH shows us a significantly reduced drawdown when compared to most Western countries. In addition, the opportunity for a near term positive move above $24.47 would suggest a chance to climb to its January highs of around $27.00.  

BMO-CHINA-EQUITY-ETFZCH.TO_English-version.jpg#asset:4051

Source: siacharts.com, as of March 24, 2020.

Looking at the relative strength comparison chart between the BMO China Equity Index ETF, and the S&P 500 Index, we see a strong directional uptrend in favor of ZCH since the latter part of 2019.  This “relative” outperformance is an important indicator of money flows, and suggests that investors are adding cash to China at a greater pace than the larger U.S. companies.

Outlook
The past couple of months have seen the most devasting erosion of equity since the great recession of 2008.  Most Western stock markets remain in Bear Market status as central banks and governments struggle to overcome the shock of the Covid-19 crisis, and the economic and political turmoil it has produced.  New leadership is often found in crisis, and despite being ground zero for the Covid-19 outbreak, China continues to weather the storm better than the U.S.  Equity risk remains high and will likely stay that way for the near future, but for those looking to identify new opportunities in lieu of current holdings, ZCH may be one for you to consider.

Jeremy Fehr

Chinese Equity: New Global Leadership

Snapshot 
Global stock markets have been in a state of turmoil from the Covid-19 health crisis, and subsequent economic fallout. In negative markets, we often find new leadership during carnage. Chinese Equity is showing its strength.

Details
BMO China Equity Index ETF (Ticker: ZCH)

Benefits
With equities showing their highest risk in over 10 years, identifying new leadership plays a key role in portfolio construction for the other side of the Bear Market.

Trade Idea – New Global Leadership
It comes as no surprise to most that China stands as a global leader on an economic basis.  This leadership though, has largely taken a back seat in its equity strength vs. strong western markets such as the United States. Over the past 10 years, China has lagged the S&P 500 on a relative strength, and absolute, basis – with equity performance that although positive, has not brought investors the same level of return as its competition in the West. That underperformance changed in the last quarter of 2019 and has accelerated during the Covid-19 crisis. At first thought, this may not make sense since the virus originated in China; they saw tremendous casualties from the virus; and in some centres of influence, are being blamed for the global repercussions.  The other side of that coin though is China has possibly seen the worst of the crisis based on reported numbers; they were able to enact sweeping and severe citizen isolation policies in a short period of time; they were able to ramp up medical services in the form of new hospitals and medical supplies, and finally, the country is getting back to work just as the worst of the Covid-19 crisis hits the West.

BMO-CHINA-EQUITY_English-version.jpg#asset:4053

Source: siacharts.com, as of March 24, 2020.

The chart on ZCH shows us a significantly reduced drawdown when compared to most Western countries. In addition, the opportunity for a near term positive move above $24.47 would suggest a chance to climb to its January highs of around $27.00.  

BMO-CHINA-EQUITY-ETFZCH.TO_English-version.jpg#asset:4051

Source: siacharts.com, as of March 24, 2020.

Looking at the relative strength comparison chart between the BMO China Equity Index ETF, and the S&P 500 Index, we see a strong directional uptrend in favor of ZCH since the latter part of 2019.  This “relative” outperformance is an important indicator of money flows, and suggests that investors are adding cash to China at a greater pace than the larger U.S. companies.

Outlook
The past couple of months have seen the most devasting erosion of equity since the great recession of 2008.  Most Western stock markets remain in Bear Market status as central banks and governments struggle to overcome the shock of the Covid-19 crisis, and the economic and political turmoil it has produced.  New leadership is often found in crisis, and despite being ground zero for the Covid-19 outbreak, China continues to weather the storm better than the U.S.  Equity risk remains high and will likely stay that way for the near future, but for those looking to identify new opportunities in lieu of current holdings, ZCH may be one for you to consider.