China Rally Will Struggle to Drag Global Stocks Along for Ride

Investors betting the recent surge in Chinese shares could help give the global equity rally a leg up shouldn’t pin all their hopes on the Middle Kingdom.

China’s stocks have less than half the “influence” of their U.S. peers over equities from the rest of the world, according to a Bloomberg analysis of 20-day correlations. The study showed that over the last 10 years, the correlation between the Shanghai Composite Index and the MSCI World Index of developed shares was just 0.21 versus a reading of 0.54 for the S&P 500 Index and an MSCI global gauge excluding U.S. equities.

A maximum possible correlation of 1.0 would signify stocks that move in lockstep.

China Rally Will Struggle to Drag Global Stocks Along for Ride

Investors have been drawn to an almost unprecedented rally in China, with the Shanghai Composite up about 12% this month. The gauge jumped 5.7% on Monday in its biggest gain since 2015, amid efforts by regulators to boost the attractiveness of stocks and hopes for an economic recovery.

The spurt has put the Chinese benchmark well ahead of global peers so far this year -- it is up about 10% through Tuesday, versus a 5% decline in the MSCI World.

For some commentators, China’s rally could just be a manifestation of a theme already seen in other stock markets this year -- the rise of the retail investor.

“Let us not forget that retail participation in the Chinese markets is arguably far higher than anywhere else in the world,” wrote Chris Weston, head of research at Pepperstone Group in Melbourne, in a note Tuesday. “With all the talk of a tidal wave of retail participation in global equities, it seems China has firmly joined the party.”

©2020 Bloomberg L.P.

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