In this article, I analyse the motivations of the three key actors on the world stage that hold sway over the financial markets – and present an investment idea on the Invesco China Technology ETF (CQQQ), where the risk-reward looks heavily favourable, taking into account technical charts and also China’s rapid growth as a technology superpower in the world.
In a note to my Marketplace service subscribers, I reflected that if we take a step back from the maelstrom of the financial markets that serve up a deluge of day-to-day noise and distractions, the million-dollar question to ask ourselves is: Who are the key actors in the world that can influence the markets and what do they want?
To that question, I dare say the three most influential actors in this world are presently US President Trump, China President Xi Jinping, and the US Federal Reserve. The world hangs by their every word and tweets each day, and they have the power to sway the markets whichever direction they prefer.
What are the motivations of these key actors?
President Trump has often taken credit for the equity rally since he took power, and he has brazenly demanded the Fed to cut interest rates. Going into presidential elections in 2020, it is very likely he does not want the equity rally to stall here. As such, Trump is likely to want to avoid a full-blown trade war with China that adversely impacts the economy going into 2020.
China President Xi Jinping and his administration have shown they are ready to take action to support the economy in times of need – such as during 2016 when the state bought equities to prevent a sliding equity bear market. China’s answer to the trade war has been to juice up the economy with stimulus and accommodative monetary policy thus far, which will likely support the equity markets.
The Federal Reserve has taken a full about-turn in their rate hike strategy this year, citing macroeconomic instability resulting from the trade war with China. The Fed’s answer to equity market weakness in previous years has been to keep monetary policy accommodative. Each Fed governor serves for four years, and Powell is unlikely to want to go down in history in notoriety as the one who ended the equity bull market by hiking rates too fast.
Examining the motivations of the three key actors in the world, all three arguably want to engineer a risk-on environment to the best of their abilities. As such, I believe the path of least resistance for global equities is still higher.
Last week, the United States Trade Representative Office came out to allay pessimism over the 10% tariffs Trump had imposed on $300 billion of exports on China, due to start on 1 September. The USTR removed some products from the list of tariffs, and added that tariffs on certain consumer products will be delayed till December 15. The news was a much-needed balm for the markets after a bruising few weeks, where the US and China traded blows, with China allowing the CNH to weaken past the psychologically key 7.00 level for the first time since 2008, hinting that it is open to weaponizing its currency as a means to reduce the impact of the US export tariffs.
Speculatively, the USTR’s modification of the tariff terms may have been due to US business leaders imploring the Trump administration to reverse the tariffs out of fear that their businesses would be further impacted. Whatever the root cause, it shows a greater willingness of the Trump administration to actually listen to other stakeholders, which is positive.
Going back to my thesis, it is not in the best interests of the two Presidents to sacrifice their economies (and indirectly, their political power) through tit-for-tat protectionist measures, and the US’s relaxation of the tariffs proves this. The US’s concessions will no doubt pave a way for China to grab the olive branch and return in kind – perhaps by strengthening the CNH below 7 against the USD, which will certainly give the equity markets a huge boost. Towards the close of the week, China said it was ready to retaliate against the US tariffs, but said it was hopeful the US would agree to meet them halfway so as to reach a trade consensus. Both sides are ready to continue talks next week.
Subscribers of my Marketplace, The Naked Charts, will be familiar with my methods for identifying high risk-reward trade entries based on technical charts. Here is one which I strongly think has the potential to benefit from a potential consensus between the US and China – the Invesco China Technology ETF (CQQQ).
Weekly Chart: Invesco China Technology ETF
The ETF provides broad exposure to China technology firms, with about 85% of its portfolio comprising of stocks from the technology sector. Its top holdings include stocks like Tencent (OTCPK:TCEHY), Alibaba (BABA), Baidu (BIDU), etc. The ETF is trading near an intersection of two key support levels (demarcated in purple). This raises the probability of the ETF finding some grounding around the $41-$42 area. The ETF has fallen close to 35% from its 52-week high of $67, and is likely to see an outsized relief rally should China seizes the olive branch offered by the US.
This ETF is strongly positioned to benefit from China’s emergence as a global technology superpower, second only to the United States. In the next five to ten years, at the rate China is growing, who is to say they will not overtake the US?
Below, I show two charts from content from Bridgewater Associates, with the source of information from McKinsey Global Institute, which shows China’s stunning progress in the field of technology. China is now attracting a significant amount of global venture capital investment in various leading technological fields, and is behind only to the United States. China is also ranked second behind the United States in terms of its share of global unicorns (by count, and by market cap).
Next, take a look at the potential for China’s technology companies to scale up. Its domestic population of about 1.4 billion dwarfs that of the United States’ population of about 327 million. This provides a readily accessible pool of end-users for China’s technology companies.
As China’s number of unicorns continues to grow, it is worth noting that it is estimated that almost half of these unicorns are backed by the technology big boys – Tencent, Alibaba, Baidu, JD.com (NASDAQ:JD) (three of which are amongst the top three holdings of CQQQ).
To sum up, trade tensions might cause near-term gyrations in the equity markets, but investors should not ignore the motivations of the three key actors in the world who dominantly hold sway over the financial markets. As such, the long-term path of least resistance of the equity markets continues to be higher. Investors should then look to put their money into markets that are steadily rising to become global leaders – namely China, and especially its technology sector. CQQQ is well-positioned to outperform in the long term, and appears to be on the cusp of rallying higher based on its technical charts.
If you like what you read and want high-conviction trading calls delivered straight to your inbox, do check out my Marketplace Service The Naked Charts, where I identify mature technical chart patterns that are on the cusp of huge, profitable, sustainable breakouts. The core aim of my service is to be both profitable and educational for you, such that over time you will be able to identify similar breakout patterns for yourself.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.