China’s small-cap stocks flash bearish signs as pricey valuations keep investors at bay without stronger policy easing
- The ChiNext gauge has lost 7.4 per cent this month, the most among major onshore stock indices and the worst start to a year since 2016
- Members trade at 56.8 times earnings, compared with 17.3 times for established industry leaders in the CSI 300 Index
Even policy easing measures over the past month are not doing much to whet the appetite for now, while a surge in US government bond yields to a 21-month high has added to the weak sentiment, according to Chen Li, a Beijing-based analyst at Chuacai Securities.
“Rising Treasury yields have put constraints on tech and renewable energy stocks and prompted funds to flow back to stocks with low valuations and high profits,” Chen added.
The ChiNext index, which tracks the top 100 companies including battery maker and Tesla supplier Contemporary Amperex Technology or CATL, tumbled 2.2 per cent on Wednesday. The gauge has lost 7.4 per cent this month, the most among major onshore stock benchmarks.
Tech stocks sold off in Asia-Pacific markets this week as the Federal Reserve signalled a potentially faster increase in borrowing costs. The Hang Seng Index erased gains in Hong Kong, falling in tandem with steep declines in Australian and Japanese equities. US stocks slumped by 1 to 2.8 per cent overnight.
The ChiNext members are now valued at 56.8 times earnings on average, compared with the five-year average of 50.9 times, according to Bloomberg data. Big-cap companies in the CSI 300 Index are valued at 17.3 times.
The gauge is trading at about 5 per cent below its 200-day moving average, an ominous signal given that it is a key technical indicator of a bullish-bearish divide in the market.
In the past month, China has injected more liquidity into the system, trimming the loan prime rate and the medium-term lending facility for the first time since April 202o. The central bank this week said it would open its toolbox wider to avert a collapse in lending.
More policy easing measures are needed to sustain the expensive valuations of ChiNext stocks. The chances are slim, given that the domestic average loan rates charged to companies are already the lowest in more than four decades at 4.61 per cent.
Some of the ChiNext popular bets have unravelled recently because of their above-average valuations. CATL, which commands about 18 per cent weight, trades at 132 times earnings, while Shenzhen Mindray Bio-Medical Electronics, the second-biggest member, is priced at 61.4 times.
The ChiNext index jumped 12 per cent last year, its third straight annual gain, as traders rode into green-energy trades to hedge against the risks from the regulatory crackdown, China-US tensions and the debt crisis of the property market.
