• Will the menace of capital control on Chinese related ADRs sink the markets?

    On Friday, the markets experienced weakness on the news that the US administration could consider restricting US investments in Chinese companies.

    Fortunately, before the close we experienced a V shaped reversal.



    Everybody knows that the largest Chinese ADRs are related to High-tech companies. (BIDU, BABA, etc.)
    These companies are cheaper than their US counterparts in terms of P/E and are growing faster. Hence, they look more attractive to US investors.

    Friday's announcement will change the story for investing in these companies. Retail investors will prefer be the first to exit these positions and hence will sell ETFs and stocks that are China related.

    This already occured for VWO, which is the biggest ETF holder of BABA stocks.

    https://www.etf.com/stock/BABA
    https://advisors.vanguard.com/iippdf/pdfs/FS964R.pdf



    We can see below that in terms of their respective 50MA positioning, $NDX looks weaker than the $SPX index. This is probably due to tech/Chinese stocks related weakness/fear.





    On Friday, momentum/tech industry groups were attracting the most selling. That money rotated into safer groups. This move was also favoured by slightly lower US 10Y rates.





    Index investors look worried here as both the QQQ and SPY display negative EV patterns.





    On the other hand, I noticed that there was a rotation from Large to smaller stocks of the S&P500.





    We can also see below that the Cumulative stays rather strong compared to the small caps weakness. This probably tells us that money is not leaving equities but is probably rotating.



    Conclusions:

    For now, I am not convinced that the US equities markets are on the verge of a major pullback.
    Funds will reduce their China related investments in the coming weeks, but the raised cash will find its way in other non-China related equities.