A Double Boom Coming

Looking through the charts this week, something big caught my eye.

One of those attention-grabbing patterns that screams out to you, if you’ve spent countless days, months and years pouring over their type.

A kind of subconscious lightning bolt.

You see, what this chart said to me was that what happens next could mean this current boom powers on for a while yet.

To unimagined highs.

Meanwhile, the mainstream is talking ‘bubble’.

To my mind when the chart looks bullish but the public sentiment is wary, that spells opportunity.

Earlier this week I spoke of how India could be the dark horse driving global growth over the next decade. Much like China was in the past two decades.

Not only has it got a similarly large 1 billion-plus population, but they’re also a lot younger. More than 65% of India’s population is below the age of 35.

That’s a huge number of people who will be working and consuming over the next few decades. A mostly-educated bunch, with ambition and determination to enjoy the trappings of life we mostly take for granted in the west.

A boon to economic growth the world over.

The proviso of this thesis though was that there needed to be ‘an India’ to take up the slack left by China as it stalls. After all, the doomsayers have been predicting a major bust in China ever since the global financial crisis in 2008.

But what if the current slowdown is the bust?

A covert soft landing that has been playing out in front of your very eyes. Perhaps in the background the bureaucratic machine of the communist state has been getting things in order?

And what if China, instead of crashing, recovers and booms over the next few years?

A double boost to the global economy, from the two most populous nations in the world.

That could mean a huge few years of returns for prepared, early investors.

Sound too good to be true?

Well, that’s what the chart hinted was a distinct possibility.

Let me show you…

The spark of an idea…

Every week I flick through the charts of the major stock and commodity indices.

It’s a shortcut to working out the best spots to research or to get a quick insight into the current state of a particular sector.

This week, this is what grabbed my attention:

China Shanghai Composite Index - Chart Monthly | 11-01-2018

Source: Incredible Charts
[Click to enlarge]

This is a 12 year chart of the Shanghai Composite Index. The Chinese equivalent of Australia’s All Ordinaries Index.

It shows the average level for all listed stocks on the exchange.

You can see the great run up in prices and subsequent decline in 2006–2008 over the course of the economic boom and GFC falls.

Then since then the levels have mostly traded in a range between 2,000 and 3,400, reflected by the two orange lines.

There was one breakout, which turned out to be a false break as the market rapidly fell back into the range in late 2014.

But look where it’s at now.

On the cusp of a second breakout…

Points like this on a chart get me interested, so I did some further digging. 

And I found out some information I wasn’t aware of. A strong signal that the Chinese government will do everything in their power to keep the economy powering along until at least 2021.

What’s so special about 2021, you ask?

It turns out that’s the 100-year anniversary of the founding of the Communist Party of China! An event that will probably be the biggest propaganda exercise in the history of mankind. A time to celebrate China’s rejuvenated success in the world.

But that brings a bit of pressure…

The reputations of the leadership rest on the need to continue the economic miracle. A badly timed recession would sour things a great deal.

And potentially cause a great deal of unrest.

After all, economic growth can smooth over a lot of other issues in a society. But conversely, a recession opens up a lot of wounds. Not just in economics but other areas of society too.

Now sceptics claim that the Chinese figures are heavily manipulated. That is, you can’t believe the economic growth figures, the stock price figures, or anything else really.

And I don’t deny this, to an extent.

But one figure that is harder to massage is the Nielsen consumer confidence score.

This is a gauge of consumer confidence done by an independent (and non-Chinese) company with a good reputation to uphold.

They say consumer confidence is on the rise in China.

And when consumers are happy, they spend money.

And when 1 billion Chinese spend money, the world economy benefits too.

2018: A boom year

Now I’ll admit this is a long bow to draw from one look at a chart and one hypothetical argument on the motivations of Chinese leadership.

But some of my best ideas and investments have come from such starts. And by ignoring the conventional opinion.

Right now, the consensus view is that the current boom is too good to be true.

The mainstream press tells us investors are irrational, volatility is too low and is set to spike, and 2018 will be a bad year for the markets.

My experience is that prices are better at getting this right than journalists.

And if the Shanghai index clears 3,400, then 2018 could be another 12 months for you to make gains in the speculative areas of the markets.


Ryan Dinse,
Editor, Money Morning

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

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