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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An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

  • ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
  • ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
  • An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

  • Trade in both the bull and the bear markets
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    Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

 

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