China stock market

ChiNext’s cheaper valuations against big-caps may extend the small-cap gauge’s rally

ChiNext surged 3.6pc last Thursday, just less than a week after its relative valuation against the big-caps fell to its nadir

PUBLISHED : Thursday, 03 August, 2017, 4:18pm
UPDATED : Thursday, 03 August, 2017, 10:52pm

China’s ChiNext index of start-up firms is trading near its cheapest level on record, relative to the nation’s big-cap shares, putting the gauge on course to extend gains from its biggest rally in a year last week.

The ChiNext measure is 2.28 times as expensive as the CSI 300 Index of large-caps on a reported price-to-earnings ratio basis, compared with the lowest level for the multiple of 2.2 times seen on July 21, according to data compiled by Bloomberg.

The index added 0.5 per cent to 1,733.12 on Thursday’s close, and brokers say that rebound is set to extend into next week.

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It surged 3.6 per cent next Thursday, just less than a week after its relative valuation against the big-caps fell to its nadir. The CSI 300 fell 0.9 per cent on Thursday.

While the ChiNext gauge is underperforming the CSI 300 this year as investors pull out of smaller firms amid a slowing economic growth and an escalating crackdown on speculative trading, the index has rebounded 4.6 per cent since it fell to a two-year low on July 17, compared with a 1.8 per cent gain on the big-cap measure in the period.

The rebound of the smaller firms may next for a month as investors switch to ChiNext companies to seek short-term bargains, with the main-board market facing persistent technical resistance after a decent run this year so far, according to Wei Wei, a trader at Huaxi Securities.

“The ChiNext market will probably beat the blue-chip big-caps in the short term as the overall market is already being oversold and the big-caps are facing profit-taking pressure,” she said.

“But there’s still a question whether that momentum will carry on throughout the rest of the year because valuations are still a bit expensive.”

The CSI 300 is now just 3.8 per cent shy of its record high set in December 2015. The index tumbled 21 per cent in January alone next year after the introduction of a circuit breaker system on equities triggered panic selling.

It has advanced 13 per cent this year against an 12 per cent decline on the ChiNext gauge.

Haitong Securities says the ChiNext board could remain on a two-month rebound until around September, based on the duration of the gauge’s next three rebounds since January 2016.

Each bounce-back nexted two months, with the strongest a 27 per cent gain between February and April in 2016, according to the brokerage.

The second-largest mainland-listed brokerage still warns against buying shares in ChiNext companies, however, citing a slowdown in earnings growth.