'The rout in Chinese stocks is only just beginning'

Whether due to lower market volatility, or the fact that markets were closed October 1-7 for the golden week holiday, China’s stock market has slipped from the headlines in recent weeks. Gone are the days of huge intra-day gyrations, something that was usually precursor to a breakneck late rally on the back of suspected market intervention from China’s national team. Now, it’s all smooth sailing at present: out of sight out of mind, as the saying goes.

However, one analyst who has form when it come to making correct call on Chinese stocks, Thomas Schroeder, managing director of Chart Partners Group Ltd, believes the relative calm seen in recent weeks isn’t likely to last, predicting that the benchmark Shanghai Composite index will tumble to as low as 2,400 points in early 2016.

Schroeder, a technical analyst, cites triangle and wedge patterns to justify his call. In August, Schroeder predicted that the rout in Chinese stocks would worsen, and the Shanghai Composite would likely fall below 3,100 points within two months. The measure fell to as low as 2,927.29 on August 26, before rebounding to close Friday’s trading session at 3183.15 points.

Although Schroeder is bearish over the medium-term prospects for Chinese stocks, he believes that mainland indices will stage a late rally in the final months of the year, fuelled by a bottoming in the crude oil price and rebound in emerging market currencies as a consequence of the US Federal Reserve’s decision to leave monetary policy unchanged at its September FOMC meeting.

“The Shanghai Composite Index will climb 29% to 4,100 in the next three months,” Schroeder told Bloomberg over the weekend.

“As oil starts to move and materials follow, investors will by default feel more positive about China.”

While short-term influences may see the benchmark Chinese index rally nearly 1,000 points higher over the remainder of the year, Schroeder suggests that in combination with chart patterns, monetary policy tightening in the US will wreak havoc on not only Chinese stocks but emerging markets as a whole.

“We haven’t seen a major low for the emerging markets,” he said.

“There’s likely to be more pain next year as the U.S. starts lifting rates.”

Year-to-date the benchmark Shanghai Composite has fallen 1.74%. Having hit a multi-year peak of 5178.19 on June 12, something that briefly saw the index rise more than 150% in just 12 months, the index has fallen 39.05%.

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