Xinhua: A-Shares Are Cheap, What Are Investors Afraid Of?

A long article on why A-shares are a buy here. The first part discussion valuations is below. Leaving questions of valuations aside (how accurate are the balance sheets?), the article misses how humans behave in speculative markets. Both the supply and the demand for speculative assets are upward sloping. The higher the price, the greater the demand. New demand comes from outside the market and the market typically won't peak until buyers are exhausted. Excess supply doesn't have an impact until the decline sets in and the buyers start selling. The lower prices go, the lower the demand. At the bottom, stocks and other speculative assets (including homes if they entered a financialized bubble phase) are dirt cheap and nobody wants them.

iFeng: 新华社:A股估值处于历史底部,人们还在担心什么?
For Chinese A-share investors, this is a bit difficult at this time. Affected by various factors such as Sino-US economic and trade frictions, the joy brought by the "White Horse Quotes" last year has long since dissipated, and now it faces the confusion of the lowering of the stock index. People wonder: Why did A shares have this round of decline? Is the adjustment in place? Will it cause systemic risk?

The factors that determine the trend of the stock market are very complicated. People often "do not know the true colors of the mountains, but only in this mountain." To see the current Chinese stock market, we must analyze it in the historical dimension.

The A-share valuation is at the bottom of the history. What are people worried about?

Looking back on the first half of 2018, the main stock indexes of A-shares staged a wave of “bungee jumping” from the new high to the new low. The Shanghai Composite Index rose to 3587.03 on January 29, 2018, hitting a two-year high, then turned down, and lost in 3,000 points, 2900 points or even 2800 points in June.

In the view of many market institutions, some recent accumulated risk events have gradually exposed, and at the same time superimposed external uncertain factors, China's stock market, bond market and foreign exchange market have adjusted. These adjustments reflect the changes expected by investors and the financial system. The necessary stage of market-oriented transformation and credit risk return to reasonable pricing.

In general, the market adjustment range is within the controllable range, and it is not appropriate to exaggerate the individual events or stage performances in the financial sector as “financial panic”.

In the view of Yan Yugen, a strategist at Haitong Securities Research Institute, the recent A-share market sentiment was sluggish, and the short-term factors affecting market sentiment did exist. For example, the United States unilaterally provoked trade wars and continued credit defaults in the context of domestic deleveraging. However, from a medium- and long-term perspective, A-shares have entered a reasonable valuation area.

Guan Tao, a senior researcher at the China Financial Forty Forum, believes that the US government’s plan to impose a 10% tariff on about $200 billion in Chinese products may bring some negative sentiment to the financial market in the short term, but in the long run, China’s financial market The fundamentals of development have not changed and there is no need to overestimate the impact.

Up to now, the Shanghai Composite Index, Shenzhen Stock Exchange Index and GEM Index have price-earnings ratios of about 12 times, 20 times and 39 times respectively. Many traditional industries and cyclical industry valuations are at the bottom of history, and the risk-to-income ratio has increased significantly. The upside of high-quality enterprises is far greater than the downside risks of the market.

"From a valuation point of view, the current overall valuation of the A-share market is already comparable to the historical bottom, and the valuation is at the bottom." Qin Peijing, chief strategist at CITIC Securities Research, said that from the perspective of corporate profit growth, At present, the profit growth rate of A-share listed companies is higher than that of other large-scale periods in history, and the impact of Sino-US trade frictions on A-shares' overall earnings is relatively limited, and the safety margin of A-shares is relatively high.

From an international perspective, the Chinese stock market is at an absolute value. The valuation of the Shanghai Composite Index is about 12 times lower than that of the US, which is significantly lower than India (22.8 times) and Brazil (18.8 times) in emerging market countries.

The analysis of the Wells Fargo Fund believes that if the short-term "worry wall" can be overcome, the current A-share market is a very favorable battlefield for long-term investment. As of July 10, the measured P/B ratio of the A-share A-share index has fallen to 1.73 times, which is basically close to the historical minimum level of 1.45 times in May 2014, far below the historical median level of 2.46 times. .

Even so, the A-share market is still shrouded in a cloud. People are worried: the escalation of Sino-US economic and trade frictions has dragged down economic growth, and the proliferation of credit default events has affected fundamentals and funds...

On the one hand, the domestic sentiment is generally depressed, and the other funds outside the border are accelerating the recruitment of A shares. The data shows that the recent inflow of funds from Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect has accelerated. The net inflows in April, May and June were 38.7 billion, 50.8 billion and 28.5 billion, respectively, a significant increase from the average of 16.6 billion yuan in 2017.

"The main reason for the increase in the divergence between domestic and foreign capital is that the investment decision-making perspective is different. The overseas funds are making multiple choice questions and looking around the world. They find that the A-share valuation and performance match are good, and the current investment value of A-shares is recognized from the medium and long-term perspective. "Yu Yugen said.

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