China stock market

Small caps gauge becomes China’s best performing benchmark of 2017

The Shenzhen Small and Medium Enterprises Index has gained 19.4 per cent this year, the best performing national benchmark

PUBLISHED : Tuesday, 17 October, 2017, 5:00pm
UPDATED : Tuesday, 17 October, 2017, 10:55pm

China’s smaller listed companies appear to be staging a comeback, as a gauge of small-cap shares emerges as the best performer among the nation’s major equity benchmarks so far this year.

Aided by an acceleration this month, the Shenzhen Small and Medium Enterprises Index has notched up a 19.4 per cent gain in 2017, overtaking large-cap stocks that had led a broader advance in the market for most of the year. The SSE 50 Index of the 50 most valuable stocks on the Shanghai exchange has risen 19.1 per cent and the CSI 300 Index’s has climbed 18.2 per cent.

The outperformance of the 100-member constituent index has posed a challenge to traders who have been sticking to big-cap shares as their major investments this year. The government’s measures to eliminate excess money from the financial system have lowered the appetite for riskier assets, spurring buying into bigger companies.

A rebound in corporate earnings, and looser liquidity on the back of a cut in the reserve requirement ratios at some banks, are stoking the rally in the small-cap gauge, according to Xun Yugen, a strategist at Haitong Securities in Shanghai.

Profit growth for the 100 companies tracked by the index may have quickened to 30 per cent from a year earlier in the third quarter, based on their own earnings forecasts, Xun said. Second-quarter earnings dropped 0.7 per cent, according to data compiled by Bloomberg.

For the full year, the companies in the Shenzhen Small and Medium Enterprises Index are expected to post a 16 per cent increase in profits, compared with a growth rates of 6.1 per cent for the SSE 50 and 11 per cent for the CSI 300, Bloomberg data showed.

Jiangxi Ganfeng Lithium, Hangzhou Hikvision Digital Technology and Tianqi Lithium Industries have led the gains in the small-cap index this year, surging at least 110 per cent. Ganfeng Lithium and Tianqi Lithium supply new-energy vehicle manufacturers with lithium products refined from ores of the metal, while Hikvision is the nation’s biggest maker of surveillance cameras.

The much improved performance of smaller firms is not broad-based. A separate composite index of all the 888 stocks on Shenzhen’s small and medium enterprises board has risen only 4 per cent this year, while the ChiNext gauge of start-ups has retreated 4.3 per cent. The SME board applies the same listing requirements as the main board, while the ChiNext market is subject to looser rules on things like profitability.

“Earnings still matter in this market and it’s not a full rotation into small-caps from big-caps,” said Wei Wei, a trader with Huaxi Securities in Shanghai. “The buying of small-caps is on a very selective basis and only those with fast earnings growth and reasonable valuations are the preferred bets.”