Date
23 June 2017
While investors are dumping over-priced small-caps, they are embracing large-caps for their cheaper valuations and the prospects for MSCI to include A-shares into the emerging market index. Photo: China Daily
While investors are dumping over-priced small-caps, they are embracing large-caps for their cheaper valuations and the prospects for MSCI to include A-shares into the emerging market index. Photo: China Daily

China equities: Small-caps, big-caps are two different stories

There has been an interesting dichotomy in the mainland market. While the CSI 300 index tumbled at one point to the year low, ETFs tracking the China A50 index have hit the highest level since last year.

Chinese investors, who used to love relatively risky small-cap stocks seem to be converting to bluechips.

Let’s revisit the market situation a couple of years ago.

In 2015, China’s A-shares went through a short-lived boom fueled by abundant market liquidity. In particular, small and mid-cap or growth enterprise board (GEB) stocks easily fetched P/E multiples in excess of several hundred. Therefore, the term price-to-dream ratio has been coined to describe stocks relying solely on fancy expectations without solid earnings support.

Two years later, China’s GEB index slumped to 1,777 points from the peak of 4,037 in mid-2015.

Amid central bank’s deleverage push, liquidity gets tighter as reflected in the climbing Shanghai interbank Offered Rate (SHIBOR). The overall market stays under pressure as daily stock market turnover fell to around 400 billion yuan on average.

As liquidity is tight, investors tend to sell over-priced stocks first. This explains why small-cap stocks have suffered heavy sell-off.

Meanwhile, large-caps, with lower valuations and the lure of SOE reform prospects, have attracted buyers.

Kweichow Moutai Co (600519.CN) has surged 35 percent so far this year. And laggard banking stocks also posted sharp gains. Industrial & Commercial Bank of China (601398.CN) has gained 17 percent year to date.

Among insurers, Ping An Insurance Group Co of China (601318.CN) is up nearly 30 percent.

Amid this situation, ETFs tracking China A 50 index, comprising the largest 50 A-share companies, have outperformed.

CSOP FTSE China A50 ETF (02822.HK) and iShares FTSE A50 China Index ETF (02823.HK) rallied 13 percent and 12.5 percent respectively year to date.

Shanghai Composite Index was up just marginally and Shenzhen market fell over 2 percent during the same period.

It’s an interesting shift that mainland investors are now focusing on bluechip stocks. Given that MSCI will announce whether it would include A-shares into the emerging market index next month, expectations of a favorable outcome may draw more investors to the bluechips.

Chinese authorities have always been trying to guide people toward value investment and curb excessive speculation on small and mid-cap stocks. The capital market is now moving in the right direction and regulators should be quite happy about that.

This article appeared in the Hong Kong Economic Journal on May 26

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RC

HKEJ columnist

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