Chartists and non-technical market observers alike have noted how closely the U.S. and Shanghai markets have tracked one another over the past two years. The Shanghai market took off a few months before U.S. stocks started climbing in March 2009; Shanghai also fell before U.S. stocks reacted to Europe’s sovereign debt crisis back in April. In short, Shanghaihas been a powerful leading indicator for traders.
Now, a wide and growing divergence in the two markets since November — the S&P 500 is up 13% and Shanghai is down 13 % — has market watchers wondering: Is the U.S. market about to crash? Or is Shanghai ready to rise again?
(A third logical possibility would be an end to their convergence. Financial blogger Joshua Brown makes this case, but even he considers it unlikely.)
For nuanced perspective on this key question as we head into the new year, we asked Frederick Jiang, portfolio manager of the Ivy Pacific Opportunities Fund (IPOAX).
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By way of background, Jiang (left) confirms the correlation in the direction of the two markets, but points out an important difference in the magnitude of their moves. For example, while the two markets moved up and down together in 2009, Shanghai went up 83%, well more than three times the S&P 500’s performance.
In any event, Jiang is firmly in the camp that the two markets will re-converge through a rise in Shanghai. While the U.S. is the world’s most important economy, China is the engine of world economic growth, he says. When the world’s second largest economy is growing at a 10% rate and U.S. growth might reach 3%, the math indicates that China is the key swing factor in setting the market’s pace.