China, India: Major Market Reversals Could Be At Hand
BMI View: We continue to call for strength in the Indian rupee and weakness in the Chinese yuan, while expecting weakness in the Indian Sensex and strength in the Shanghai Composite Index. This would mark a major reversal from the trends seen over recent months. Valuations, technicals, and the outlook for monetary policy all favour such a reversal.
When a country's economic fundamentals are improving, strength in its equity market tends to go hand in hand with currency appreciation, and vice versa. Broadly speaking, both rising equity prices and a stronger currency should reflect the increase in economic output that investors are discounting in the future. Although there are times when high inflation can undermine a currency but boost nominal equity performance, this is rare, as earnings multiple contraction usually outweighs any increase in nominal earnings expectations.
Episodes of currency weakness combined with equity strength, or equity weakness combined with currency strength, should be treated with caution, in our view. Rather than being a sign of uniform strength or weakness, it signals a divergence in outlooks for the two assets, which are highly likely to be corrected in a swift manner.
|One Topping Pattern, One Basing Pattern|
|Indian Sensex Vs Shanghai Composite Index|