Asian Stock Markets Have Become Anti-Correlated

The consensus has egg on its face with respect to Chinese stocks. It wasn’t supposed to be this way. Entering this year, one of the big concerns—and the primary reason for China’s ugly multi-year bear market—was the country’s destiny with a “4-handle” on gross domestic product (GDP) growth.

Now, stocks are melting up, and the repricing is for mid-5% growth in Q2. During the 10% growth days, this would have devastated, but with the real estate implosion a well-known quantity, a “GDP fiver” is a relief. An impressive surge in Chinese stocks has taken hold.

Interestingly, China’s up-and-down moves have been greeted with indifference by regional rivals, namely India and Japan. The CliffsNotes: Over the last year, those two markets were rallying, flying really, while China was in freefall. Now that China is “on,” Indian and Japanese stocks are paying no attention. In the eyes of an asset allocator, this anti-correlation is manna from heaven, should it persist.

Consider the action in the Hang Seng Index of Hong Kong-listed equities. That Index’s last notable peak was July 31 of last year, at 20,011. The tumble was ugly; the low was 15,277 on January 16. Now look at Japan’s Nikkei 225. In that time, the Index ran higher, from 33,476 to 35,478.

Like Japan, India also doesn’t want to correlate with China. The country’s SENSEX Index put together a rally—and a strong one at that—from 66,527 to 73,128 in that July 31-to-January 16 window that saw Chinese equities tanking. The S&P 500 also ignored China; it went from 4,576 to 4,739 in that time.