This Analyst Says China's Stock Rally-to-Rout Is About to Repeat

  • Analyst correctly predicted China stocks' drop in August
  • Fed rate increase seen ending emerging-market rebound

In August, Thomas Schroeder correctly predicted a rebound in Chinese stocks wouldn’t last. Now, he says, the benchmark equity gauge will plumb new lows as a bear-market rally fails.

The Shanghai Composite Index will climb to 4,100 in the next three months before slumping as much as 41 percent to 2,400 in early 2016, Schroeder, the Bangkok-based founder and managing director of Chart Partners Group Ltd., said in an interview in Singapore. The benchmark index added 3.3 percent to close at 3,287.66 on Monday. Schroeder, a former Asian technical analysis chief at UBS Group AG, cited triangle and wedge patterns in making his call.

The Shanghai Composite tumbled 29 percent in the third quarter, the biggest slump among benchmark global gauges, as a stock boom turned to bust amid concern about the slowdown in China’s economy and a crackdown on using borrowed money to buy equities. The bottoming of oil prices and a rebound in emerging market currencies will help bolster a rally in the nation’s equities in the next two months, which will reverse as the Federal Reserve starts raising interest rates, Schroeder said.

“As oil starts to move and materials follow, investors will by default feel more positive about China,” he said. “This is a bear market rally."

Schroeder predicted in August that the Chinese equity rout will worsen, with the Shanghai Composite likely sliding below 3,100 within two months. The measure fell to as low as 2,927.29 on Aug. 26. Technical analysts use past patterns to try to predict future movements.

Oil Prices

Oil posted its steepest rally since August last week, with West Texas Intermediate climbing briefly above $50 a barrel. A measure of global emerging equities jumped 4.4 percent, extending its rebound from a Sept. 29 low to 8.2 percent. Odds of a Fed liftoff this year have fallen to below 50 percent, with traders predicting a 62 percent chance of a rate hike by March. Investors pulled $40 billion out of developing economies in the third quarter when Fed concerns were at their height, fleeing emerging markets at the fastest pace since the height of the global financial crisis.

“We haven’t seen a major low for the emerging markets," said Schroeder, whose Chart Partners Group is a provider of trading strategies linked to technical analysis. “There’s likely to be more pain next year as the U.S. starts lifting rates.”

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