China stock market

China’s Shanghai Composite Index caps longest streak of gains in 25 years

Although investors are optimistic over outlook for this year, signs indicate that Chinese stocks are technically overbought and are poised to decline in the short term

PUBLISHED : Friday, 12 January, 2018, 5:02pm
UPDATED : Friday, 12 January, 2018, 5:17pm

Just two days after Hong Kong’s Hang Seng Index recorded its longest rising streak in history, China’s benchmark stock gauge shattered a similar milestone that stood for 25 years.

On Friday, the Shanghai Composite Index closed up 0.1 per cent at 3,428.94, gaining for an 11th consecutive session. The stretch is the longest since a run of 14 days ended in May 1992.

China’s stabilising economy, continuing earnings growth and overseas fund inflow ahead of mainland equities joining MSCI benchmarks in June are among the factors investors and strategists have pointed out for their optimistic outlook about the nation’s stocks this year.

China’s offshore market is also enjoying the party. The Hang Seng Index recorded a streak of 14 consecutive days of gains on Friday, the longest such run since its inception in 1969. The gauge is now 1 per cent away from its all-time high set a decade ago.

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China and Hong Kong stocks are rising “amid positive global sentiment”, said Hong Hao, managing director at Bocom International Holdings. “Global markets are rising on the back of solid economic numbers and interest rate hikes by central banks.”

Still, such long winning streaks do not bode well for stocks going by China’s market history.

When the Shanghai Composite rose for 10 straight sessions in March 2015, the gauge peaked three months later and subsequently tumbled almost 50 per cent as the bubble burst.

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In the case of the 14-day winning streak in 1992, the index plunged 60 per cent six months later.

Shanghai Composite’s longest streak of gains dates back to the period from 1991 to 1992, in the very early days after the Shanghai Stock Exchange started operation in 1990. The index rose every session from October 3, 1991 to February 24, 1992.

Signs have already emerged that Chinese stocks are technically overbought and are poised to decline at least in the short term. The 14-day relative strength index for the Shanghai Composite, a gauge of how rapidly securities prices change, rose to 69.2 on Friday, close to the 70 level seen by some traders as a signal that stocks will fall.

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Since the start of the year, traders have been loading up on consumer-staples stocks, the best-performing sector last year, shrugging off concern that valuations might be stretched and financial deleveraging would weight on sentiment.

A gauge of consumer-staples companies has climbed 11 per cent so far this year for the biggest gain among industry groups, thanks to price increases by Chinese fiery liquor giant Kweichow Moutai. The measure beat any other sector in 2017 with a surge of 81 per cent.

The sub-index is valued at 27 times estimated earnings for the following 12 months, the highest level in almost three years, according to Bloomberg data.