Policy and politics are issues that have great impact on the risk/return outlook across markets and geographies, but I think it’s fair to say that for a market like China, policy and politics matter probably more than any other factor (given the mix of socialism, autocracy and capitalism which characterize modern China). And as China A-shares are looking increasingly cheap, it’s worth examining the key policy and political trends in China.
This week’s chart comes from a report on China A-shares, where we looked at the changing valuation picture and potential upside catalysts.
The chart shows the Economic Policy Uncertainty index for China against the Shanghai Composite – the major A-share benchmark on the Mainland.
Specifically, the Economic Policy Uncertainty index is based on a set of algorithms which read and detect the appearance of certain words and phrases in the news to build a gauge of the level of economic policy uncertainty. As you can see with the chart, there is an interesting link between this index and the movement in the Shanghai Composite.
We’ve found that both in China and other global equity markets, there tends to be an inverse correlation to the Economic Policy Uncertainty index. This makes sense for a few reasons, firstly it’s often changes in economic policy (e.g. monetary policy – think rate hikes) that can precipitate market downturns where you tend to see policy uncertainty spike.