Evergrande Collapses: Will the Chinese Stock Market Rise or Fall?

This week, I put the Chinese stock market under the microscope as to whether it is set to explode or implode. Evergrande, the world's most indebted property developer, was ordered to liquidate last Monday, leaving a trail of more than 300 billion dollars in liabilities. This raises the question as to whether this is a catalyst for China’s stock market to implode or an opportunity to invest in one of the biggest economies in the world.

Will the Chinese stocks market implode or is it an opportunity to invest?

If you set your mind back to the 2008 financial crisis, the term ‘too big to fail’ came to life whereby government intervention saved companies deemed too important to go under. What I find interesting about Evergrande is that while it holds the title of ‘too big to fail’, the Chinese government has not stepped in to save the embattled developer. This situation is a ‘first’ in recent history, which is why there is so much uncertainty around the Chinese market.

That said, looking at the price chart of the Shanghai Composite Index (Code: SSEC) and the Hang Seng Index (Code: HSI), both markets are down over 50 per cent from their all-time highs. So, has the current situation already been priced in?

Throughout history, a 50 per cent fall in price has been a solid benchmark in measuring market falls before they begin their next bull run. This was evident with the GFC, where the Australian and the US markets fell by 50 per cent in 2008 before rising strongly. Other examples include 2000 and 1973 where the US S&P500 fell 50 per cent. What's important to note is that each time the market fell to this level, buyers entered, taking the market higher and providing some of the best opportunities for investors and traders alike.

As a result, now is a great time to analyse both the Hang Seng and Shanghai Index because if they are near the bottom, potentially great opportunities await those who have done their homework and are ready. So, what does that mean for the Australian market? Given our strong economic relationship with China, this is positive news for our market long term, as a rise in the Chinese market will support a rise in the Australian market.

What were the best and worst-performing sectors last week?

The best-performing sectors included Real Estate, up 5.90 per cent, followed by Energy, up 3.80 per cent and Information Technology, up 2.97 per cent. The worst-performing sectors included Utilities, up 0.80 per cent, followed by Industrials, up 1.06 per cent and Materials, up 1.13 per cent.

The best-performing stocks in the ASX top 100 included Treasury Wines Estates, up 9.14 per cent, followed by The A2 Milk Company, up 8.66 per cent and Goodman Group, up 8.27 per cent. The worst-performing stocks included AGL Energy, down 7.16 per cent, followed by Incitec Pivot, down 5.52 per cent and Lynas Rare Earths, down 4.27 per cent.

What's next for the Australian stock market?

This week was more of the same for the Australian stock market as it continued its charge towards the all-time high of 7,956. This week also culminates with the beginning of February, so I decided to perform some seasonality analysis to see how January 2024 fared to previous years and what we could expect this month.

What I found super exciting is that January 2024 beat the average gain for January over the last 40 years, confirming that the market has indeed had an abnormally strong start to the year. What I also found interesting is that statistically, February is one of the least active months of the year. By that, I mean February generally ends up where it started. Given that we are so close to the all-time high, I would not be surprised if investors exercised caution at this level, which would also result in this month being flat.

Quite often, when markets make or are near their all-time high, the price takes a slight pause or has a small correction. This is because these levels instil fear of the unknown among investors, resulting in short-term profit-taking or caution entering the market until a clear break confirms the continuation.

In the short term, if our market pulls back over the next week or two, I see support at the 7,700 level. However, given the strength shown in January, I would not rule out the possibility of an even shorter pullback, followed by a reversal upward that will take out the all-time high in the next couple of weeks.

For now, good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.