Adapting the Merrill Investment Clock to Chinese Equity Sector Rotation

Summary

This research summary adapts the Merrill investment clock to Chinese A-shares by grouping sectors according to their economic-cycle behavior and proposed roles across recovery, overheating, stagflation, and recession. It describes two index families: clusters formed from sector-index correlations using a minimum spanning tree, and phase-specific baskets. The examples assign property and autos to recovery, nonferrous metals and coal to overheating, healthcare and retail to stagflation, and toll roads and airports to recession. It also discusses industry growth stability, inflation pass-through, and combining the baskets into cyclical, defensive, value, and growth indices.

The proposed rotation moves from cyclical growth to cyclical value, defensive value, and defensive growth as the cycle advances. The article cites historical relationships, including correlations between commodity-related sectors and a raw-materials index, and describes a liquidity and market-cap screen for constituent selection. It notes that applying the original framework directly to A-shares performed poorly, motivating local adjustments. The text gives no complete current-cycle signal rules or detailed performance statistics, and its sector relationships and phase timing may not persist.

Key ideas

• The framework classifies sectors by their relationships to four macroeconomic phases and builds corresponding equity baskets.
• Sector clusters are formed from correlations among industry indices using a minimum spanning tree.
• The proposed rotation progresses from cyclical growth to cyclical value, defensive value, and defensive growth.
• The research considers industry growth stability and the ability to pass input-cost inflation to customers.
• Direct use of the original Merrill clock reportedly worked poorly in A-shares, and the document does not establish that the revised timing will persist.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.