Portfolio | Small cap stocks in China’s Shenzhen market in bubble territory, risking crash
“There are a lot of worries as to what happens to the China and Hong Kong markets, in the event of a repeat of the 2007 bubble and whether it will end in tears again” - Credit Suisse analyst Vincent Chan
Small cap stocks in Hong Kong and in mainland China are in a perilous bubble, making them vulnerable to a sharp correction that would put punters in a hole at a time when the country is struggling with huge debts and a softening economy.
“There are a lot of worries as to what happens to the China and Hong Kong markets, in the event of a repeat of the 2007 bubble and whether it will end in tears again,” Credit Suisse analyst Vincent Chan said in a report.
“The bad news is that P/Es (price-earnings ratio) of small caps in China, represented by the Shenzhen SME (small and medium enterprise) and ChiNext market, are at bubble valuations. At some point, there will be a massive correction of these stocks. Avoid this space!!!” warned Chan.
The Shenzhen stock market has more small-cap stocks than the Shanghai stock market, which is populated by large state-owned enterprises (SOEs).
Shenzhen remains overvalued despite the sell-off last Thursday when it slid 5.5 per cent.
On the simple price/earnings ratio (P/E) metric used by most analysts, the average P/E of Shenzhen A-shares has surged to 61.33 times on May 28 from 39.86 times on February 28. The average P/E of the GEM (Growth Enterprise Market) has grown nearly eightfold to 88.32 times on May 28 from 11.96 times three months ago on February 28.
In comparison, the average P/E of the main board of the Hong Kong Stock Exchange and Shanghai A-shares were at 12.42 times and 21.95 times on May 28 respectively.
