[After the Spring Festival, bulk-holding stocks continued to decline, with continuous falling market indexes. There is no sign of rebound after the collective collapse on February 22. Some people say that all the money they made last year has been lost; some people say that the bargain-hunting is endless; and some people say that the style of stock market has changed.
What is the internal cause for the continuous falling of stock market? How long will it take to rebound? Has the market style changed? What should investors pay attention to? Recently, Prof. LIU Qigui, ZJU 100-Young Professor from the School of Management, shared his analysis in an interview of Zhejiang News.]
Q1. What are the reasons for continuously falling of stock market?
Prof. LIU believes that there are two main reasons: On the one hand, the rising cost of capital brought by recent rise in 10-year U.S. Treasury Securities fields had led the decline in stock market valuations. On the other hand, the most important reason is the adjustment demands of market itself. Based on the finance model of modern company: the intrinsic value of company is equal to the present value of future cash flow. Therefore, companies with stable growth in future performance can obtain high valuations.
The stocks that have fallen recently are mainly white horse stocks with stable expectations of performance growth. However, the market price of those stocks has increased significantly last year for around 100% on average and as high as 300% for some stocks, resulting in a very high valuation of those stocks. It is thus not surprising to see that investors have strong motivation to cash out.
At the same time, those stocks have big market cap and are heavy weighted stocks of the major market indexes. The drop of stock price drives the market index to fall significantly.
Q2. How long will the phase of adjustment of stock market be?
Prof. LIU thinks that this essentially depends on whether the performance growth of company can support the current price level to digest the current relatively high valuation. What kind of valuation is reasonable? The general P/E ratio of white horse stocks in mature markets is about 30 times. There may be a certain adjustment space for some white horse stocks in China; for fast-growing track stocks with strong market space and policy support, the focus is on whether the earnings growth rate in the future can exceed investors’ expectation.
Q3. “Market style switching” has become a hot topic in stock market recently. Has the style of market changed?
From the perspective of market performance, since this year, expectations of economic recovery and monetary policy changes, rise in price of bulk commodity have driven the rise of bank, non-ferrous metal, chemical stocks and other stocks. The intrinsic driving force is the restoration of procyclical valuation. The performance of these companies has improved with rise in price of bulk commodity.
However, this does not indicate the switching of market style. Prof. LIU believes that, in the foreseeable future, Chinese economy will enter post-industrialization era, consumption and technology would be the main driving force of the market indexes. The cyclical stocks represented by traditional industry does not have the momentum to support rapid growth; from the perspective of the global market, the P/E ratio of traditional industries is generally about 10 times, with an obvious ceiling in overall valuation.
For the performance of after-market, He thinks that the market is now in the window period of performance. The current capital is looking for undervalued mark constantly. There will be a certain differentiation after performance confirmation, high-quality companies will be recognized by the market.
Q4. According to the latest data from China Securities Depository and Clearing Co., Ltd, as of the end of February this year, the total market investors of A-shares was 181,478,700, of which natural persons accounted for 99.77%. What do you think of the current investor structure of A-shares?
The large number of individual investors reflect the strong demand of common people for investment, which can be seen that the healthy development of capital market in the future is of great significance to every family and individual.
Although from the perspective of structure, the current proportion of retail investors in A-shares investors is still relatively high, the inevitable trend in the future is an institutional investor dominated market. The development path must be to strengthen institutional investors, rather than persuade retail investors to quit.
Q5. What advice do you have for retail investors?
