Evergrande: Is China's stock market going to sink or soar?

Evergrande, the world's most indebted property developer, was ordered to liquidate on Monday, leaving a trail of more than $300 billion in liabilities.

This raises the question as to whether this is a catalyst for China's stock market to implode or an opportunity to invest in one of the biggest economies in the world.

If you set your mind back to the 2008 financial crisis, the term 'too big to fail' came to life whereby government intervention saved companies deemed too important to go under.

Is Evergrande really too big to fail?

What I find interesting about Evergrande is that while it holds the title of 'too big to fail', the Chinese government has not stepped in to save the embattled developer.

This situation is a 'first' in recent history, which is why there is so much uncertainty around the Chinese market.

That said, looking at the price chart of the Shanghai Composite Index (code: SSEC) and the Hang Seng Index (code: HSI), both markets are down more than 50% from their all-time highs.

So, has the current situation already been priced in?

What did we learn from the GFC?

Throughout history, a 50% fall in price has been a solid benchmark in measuring market falls before they begin their next bull run.

This was evident with the global financial crisis (GFC), where the Australian and the US markets fell by 50% in 2008 before rising strongly.

Other examples include 2000 and 1973 where the US S&P500 fell 50%. What's important to note is that each time the market fell to this level, buyers entered, taking the market higher and providing some of the best opportunities for investors and traders alike.

As a result, I believe now is a great time to analyse both the Hang Seng and Shanghai Index because if they are near the bottom, potentially great opportunities await those who have done their homework and are ready.

So, what does that mean for the Australian market?

Given our strong economic relationship with China, I think this is positive news for our market long term, as a rise in the Chinese market will support a rise in the Australian market.

What are the best and worst-performing sectors this week?

The best-performing sectors include Energy and Real Estate, which are up more than 2%, followed by Utilities, up more than 1%.

The worst-performing sectors include Industrials, Information Technology and Materials, which are all just in the red for the week so far.

The best-performing stocks in the ASX top 100 include the A2 Milk Company, up more than 7%, followed by Treasury Wies Estates, up more than 5%, and Block, up more than 4%.

The worst-performing stocks include Incitec Pivot, down more than 7%, followed by Lynas Rare Earths, down more than 6% and Worley, down more than 4%.

What's next for the Australian stock market?

This week was more of the same for the Australian stock market as it continued its charge towards the all-time high of 7956.

This week also culminates with the beginning of February, so I decided to perform some seasonality analysis to see how January 2024 fared to previous years and what we could expect this month.

What I found super exciting is that January 2024 beat the average gain for January over the past 40 years, confirming that the market has indeed had an abnormally strong start to the year.

What I also found interesting is that statistically, February is one of the least active months of the year.

By that, I mean February generally ends up where it started. Given that we are so close to the all-time high, I would not be surprised if investors exercised caution at this level, which would result in this month also being flat.

Quite often, when markets make or are near their all-time high, the price takes a slight pause or has a small correction.

This is because these levels instill fear of the unknown among investors, which can result in short-term profit-taking or caution entering the market until a clear break is made confirming the continuation up.

In the short term, if our market pulls back over the next week, I see support at the 7700 level.

However, given the strength shown in January, I would not rule out the possibility of an even shorter pullback, followed by a reversal upward that will take out the all-time high in the next couple of weeks.

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