Year of the Rooster: A Trend Breaker?

摘要 - 创业板的长期上升趋势已被打破。这个现象值得注意。历史上，信用利差与大小盘股的相对表现密切相关。信用利差扩大时，小盘股相对大盘股的表现则不佳。这说明市场已开始对公司质量的好坏区别对待。 创业板的技术反弹很可能也仅仅停留在技术层面，而其周期的大潮已经逆转。流动性收缩将凸显创业板估值的高昂。美国市场的等权重回报率和价格与息税折旧摊销前利润的比率已见顶。这种现象在1998年亚洲金融风暴和俄罗斯违约、2000年互联网泡沫破灭和2007年底次贷危机开始、市场运行到历史大顶的时候，以及2015年中国市场泡沫破灭之时也曾出现。海外市场运行到了重要的阻力点位。

这是我们今天的报告《鸡年大吉：顺流，逆流？》的英文版《The Year of the Rooster: A Trend Breaker?》。转载请注明出处。请点击"阅读原文"观看我与吴晓波老师对2017年的股市展望对话节目《2017年股市的钱途在哪里》。

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Summary - The ChiNext has violated its secular rising trend. Investors should take note. Credit spread historically has been closely correlated with the relative performance of large versus small caps. The spread has widened, concurrent with the underperformance of small caps. The market has started to differentiate the quality of companies. The reprieve in the ChiNext will likely be technical only, and the tides have turned. Tighter liquidity will make ChiNext’s rich valuation an even more acute issue. Price/EBITDA and market geometric return are peaking in the US, similar to Asian Finanical Crisis and Russian Default around 1998, the TMT bubble in 2000, the subprime crisis starting at the end of 2007, and just prior to the Great China Bubble bursting in mid 2015. It bodes ill for overseas markets.

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ChiNext’s rising trend has broken. Recently, the ChiNext has violated its long-term rising trend, with intraday plunges of over 6% (Focus Chart 1). But the trend in Shanghai Composite has withstood the test, and the tendency of doubling every decade, which has been consistent with China’s growth target embedded in the Five-Year-Plans, persists (please see our report “The Market Bottom: When and Where?” on June 6, 2016. Focus Chart 2). Now the important question is which trend to trust?

Focus Chart 1: ChiNext’s rising trend is breaking down. 

The market has started to differentiate quality of companies. Pundits were quick to explain the ChiNext’s recent plunge. Some believed that the accelerated pace of IPO was to blame. But the amount raised by IPOs in 2016 was only ~RMB 150bn in a market valued at well above RMB 50tn and turning-over RMB 500bn daily, albeit the number of IPOs has grown. Further, this theory does not explain why the large caps have held steady despite the volatility in ChiNext. Potentially, however, declining return from IPOs could induce liquidation in some positions held to be qualified for the IPO lottery, and thus represents an overhang on the market.

Some believed that the looming unlocking of private placements would strain market liquidity. True, private placements amounted to over 1700bn in 2016, and their unlocking would drain some liquidity. But the time of unlocking was scheduled well before hand, and thus could not explain the sudden plunge. And the diverting performance between large and small caps remains a puzzle.

Focus Chart 2: the Shanghai Composite on track to double every ten years.

We note that credit spread between lower-grade bonds and treasury has surged. That is, the credit market is starting to demand a much higher premium on companies with lower credit ratings. The credit spread historically has been highly correlated with the relative performance of large versus small caps, both in China and in Hong Kong (Focus Chart 3). Intuitively, as the financing costs of lower-quality companies start to surge when treasury yields are rising and credit spread is widening, the return on their stocks will suffer. When the market is bullish and is flushed with money, this may not be a hindrance to small caps. But in a bear market as it is now, stock prices should start to reflect the quality difference between companies. 

Focus Chart 3: The market is starting to price in difference in company quality. 

While the ChiNext seems to have double-bottomed at the level where it plunged to after the stock market bubble burst in 2015, the credit spread and treasury yield (risk-free rate) should continue to rise in the coming months. As such, any bounce in the ChiNext will likely remain as a technical bounce within a longer-term trend that has now reversed.

Euphoric sentiment in overseas markets bodes ill near term. Two important measures of market sentiment in the US, namely, the market geometric return and the Price/EBITDA ratio of S&P 500 are peaking (Focus Chart 4). The market geometric return is an equal-weighted return index. It gives more weight to smaller caps when calculating the return. Its peaking suggests that small caps’ return relative to large caps has been significant, and suggests reckless risk-taking. The meaning of peaking Price/EBITDA for S&P 500, a type of quasi cash-flow valuation, is palpable. Similar phenomenon occurred in the Asian Finanical Crisis and Russian Default around 1998, the TMT bubble in 2000, the subprime crisis starting at the end of 2007, and just prior to the Great China Bubble bursting in mid 2015. Euphoric sentiment tends to augur ill for the market.

Focus Chart 4: Geometric return and valuation are peaking in the US, suggesting euphoric sentiment and auguring ill. 

A review of our calls in 2016: We estimated that the trading range for the Shanghai Composite in 2016 was between 2500 and 3300 (“Outlook 2016: the Chinese Curse” December 9, 2015). In January 2016, the Composite plunged to ~2600 after the circuit breaker triggered sell-off induced by the second round of RMB devaluation. It then peaked at 3301 intraday on November 29, 2016. Our hits and misses in 2016 are summarized in Focus Chart 5 and 6, with report titles and dates in bold. Red color denotes more cautious views at the time of reports. We are glad that we have more hits than misses, and we you and your family a great Year of the Rooster.

Focus Chart 5: The Shanghai Comp has traded between 2600-3300 in 2016, within our estimated range of 2500-3300.

Focus Chart 6: A review of our calls on HK in 2016.

Hao Hong, CFA

2017-01-23

请点击"阅读原文"观看我与吴晓波老师的股市展望对话节目《2017年股市的钱途在哪里》。