Are the bulls back for the SGX FTSE China A50 Index Futures?

03 May 2024

By Danish Lim, Investment Analyst for Phillip Nova

The SGX FTSE China A50 Index Futures contract derives its value from the FTSE China A50 Index, which has shown significant outperformance compared to broader indices such as the CSI 300 (+5.18%) and the Hang Seng Index (+5.18%). This index comprises the 50 largest A-Share securities, representing mainland Chinese companies trading on the Shanghai or Shenzhen stock exchanges. Notable constituents include well-known companies like liquor company Kweichow Moutai, battery giant CATL, and the China Merchants Bank.

Our analysis, utilising Fibonacci Retracement based on historical highs, suggests a cautiously optimistic outlook for the FTSE China A50 Index Futures. We anticipate its movement to be confined within a certain range throughout 2024, specifically between the 61.8% and 76.4% retracement levels. It seems like much of the headwinds and structural issues faced by the index has been priced in and now the market waiting eagerly for catalysts in the form of positive economic data.

Recent market activity has seen overseas investors directing funds into onshore equities via trading links with Hong Kong, likely influenced by improving economic indicators and strong corporate earnings. Additionally, with the Federal Reserve expected to maintain higher interest rates for an extended period, there’s a noticeable shift in investment towards Chinese equities, which offer attractive valuations compared to the relatively expensive US equities.

Examining the sector composition of the FTSE China A50 Index reveals a notable transition over the years, with industries like Discretionary, Staples, & Health now taking precedence over Financials & Real Estate as of the end of 2022. This shift underscores China’s evolving economic landscape, transitioning towards a more consumption-driven growth model, presenting promising investment prospects. China’s growing middle-income population is expected to hit 400 million by 2030, with consumer spending is expected to swell to around US$6.4 trillion.

One key characteristic of A-share companies is their reliance on domestic revenue, which renders them less susceptible to global geopolitical tensions and macroeconomic fluctuations. Additionally, China’s fiscal and monetary policies often deviate from those of Western economies, contributing to a low correlation between the FTSE China A50 Index and its developed market counterparts.

Looking at the chart, the contract has displayed a consistent upward trajectory since the beginning of 2024, with various indicators signalling a bullish momentum. These include the “Golden Cross” formation, where the 50-day moving average surpasses the 200-day moving average, along with positive readings from the Moving Average Convergence Divergence (MACD) indicator.

In summary, the SGX FTSE China A50 Index futures contract presents compelling diversification opportunities at attractive valuations. While risks such as the US elections persist, A-shares offer relatively better downside protection due to lower susceptibility to regulatory interventions compared to offshore counterparts. We have a cautiously optimistic view on the SGX FTSE China A50 Index Futures and expect it to end the year between the 61.8% retracement level (around 13,300 to 13,343) and the 76.4% retracement level around 13,982 to 14,000).

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