Stock Picking Gets Harder in China as Shares Move in Tandem

(Bloomberg) -- The opposite ends of China’s stock market have never been this synchronized.

The 120-day correlation between an index tracking some of Shanghai’s largest stocks, dominated by state-owned financials, and Shenzhen’s smaller tech-heavy ChiNext gauge last week rose to the highest on record, according to data compiled by Bloomberg.

It illustrates how market sentiment is becoming macro-driven, with wider economic issues having more of a bearing on investors’ decisions than company fundamentals, analysts say. That makes China a harder place for stock-picking managers, or domestic equity investors seeking to diversify.

"People are trading stocks based on their assessment of the macro economy instead of execution of individual companies -- that’s why they are highly correlated," said Alex Wong, director of asset management at Ample Capital Ltd. "This is a sign of a bear market."

Correlation between the two indexes reached 0.8 on Jan. 2. A reading of 1 signals they’re moving in perfect lockstep. The the SSE 50 Index climbed 1 percent on Friday, while the ChiNext advanced 0.2 percent.

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While different issues helped push the indexes lower last year, both have been driven higher in 2019 by improving expectations toward U.S.-Sino trade talks and optimism over policy easing in China, according to Ken Chen, a Shanghai-based analyst with KGI Securities Co. The ChiNext slumped 29 percent in 2018, while the large-cap SSE 50 Index retreated 20 percent.

"If we see some bullishness the correlation is likely to break," said Ample Capital’s Wong, adding that small caps would outperform in that scenario. In an expanding economy, "small caps tend to be better because they have more flexibility and more room to grow."

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