Cherish it! It may be 3000 points for the last time

Xue Hongyan

2024-06-28 08:00Vice President of Xingtu Financial Research Institute Vice President of Xingtu Financial Research Institute

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01 Recently, the Shanghai Composite Index fell below 3,000 points again, causing investors to worry about the future performance of A-shares.

02 The Shanghai Composite Index is a full-sample index, and the constituent stocks continue to expand, resulting in high valuations of new stocks dragging down the index.

03Due to the weighting method of total market capitalization, the industry distribution of the Shanghai Composite Index is traditional, and it is difficult to share the dividends of new economic growth.

04However, from a valuation perspective, the current price-to-earnings ratio of the Shanghai Composite Index is less than 13 times, which is at a historical low.

05 There is reason to believe that the Shanghai Composite Index may fall below 3,000 points this time may be the last time, and it is expected to gradually rise in the future.

Technical support is provided by Tencent Hybrid Model

Recently, as the Shanghai Composite Index fell below 3,000 points again, investors were simply tortured crazy - U.S. stocks can hit new highs repeatedly, why are A-shares endless, and they can't always break through 3,000 points?

The 3,000-point curse is deepening investors' expectations that A-shares will continue to repeat 3,000 points. At this time, if you think about it the other way around, is it possible to assume that this is the last time it falls below 3,000 points? And what does that mean?

Don't blurt out that it is impossible, in the capital market, there is nothing impossible. Starting from this hypothetical argument, let's begin our reasoning process.

Let's first get to know the Shanghai Composite Index.

First, the Shanghai Composite Index is a typical full-sample index, consisting of all stocks listed on the Shanghai Stock Exchange and depositary receipts issued by red-chip enterprises, excluding only ST and *ST stocks. This means that with more and more new listings, the constituent stocks of the Shanghai Composite Index have also been expanding. At the end of 1992, there were only 7 constituent stocks in the Shanghai Composite Index, 969 at the end of 2011, 2,155 at the end of 2023, and 2,188 at present. In the future, the number of constituent stocks will increase more and more (I hope to control it).

The biggest problem with the full sample index is that it includes all new stocks, which means that it is responsible for digesting the high valuation of new stocks. There has always been a trend of speculation in new stocks in A-shares, and the valuations of new stocks and sub-new shares are usually unreasonably high, and the Shanghai Composite Index has absorbed new shares at a high level, and after coming in, new stocks have begun to experience a long decline, which has formed a continuous drag on the Shanghai Composite Index. Since 2020, the amount of funds raised in A-share IPOs has risen significantly, which has brought greater pressure on the valuation of the broader market index.

Second, the Shanghai Composite Index is a total market capitalization-weighted index, which will increase the weight of individual stocks with a lower proportion of circulating market capitalization compared with the mainstream free-float market capitalization. In practice, in addition to the restricted shares expressly announced by the listed company, for (1) the shares held by the founders, families, senior managers, etc. of the company for a long time; (2) state-owned shares; (3) shares held by strategic investors; (4) In the case of employee stock ownership plans, if the shareholding ratio (including persons acting in concert) reaches or exceeds 5%, it is also regarded as non-free float shares, and other shares are free float shares.

As of June 25, the top 10 heavy stocks in the Shanghai Composite Index were Kweichow Moutai (total market value of 1,867.5 billion yuan VS free float market value of 816.4 billion yuan), PetroChina (16273VS1105), Industrial and Commercial Bank of China (15098VS1882), Agricultural Bank of China (13600VS1298), Bank of China (9527VS911), China Shenhua (7245VS1177), China Merchants Bank (7076VS3631), Yangtze Power (7010VS3012), Chinese Life (6420VS462) and Sinopec (5949VS874) have a huge gap between their total market capitalization and free-float market capitalization.

On the bright side (if everyone agrees), it is more convenient for rescue funds to buy weights and pull indexes, such as Chinese Life ranks among the top ten weighted stocks, with only a circulating market value of 46.2 billion yuan, and large funds can easily pull up and down.

On the downside, this weighting method makes the sector distribution of the Shanghai Composite Index more traditional, making it difficult to fully share the benefits of new economic growth. Especially since 2010, with the rise of the domestic mobile Internet and platform economy, the Shanghai Composite Index has not shared too many dividends. Based on the end of 2012, indexing the Shanghai Composite Index and the Wind All A Index (free float market capitalization weighting, including all A-shares) will show that the Shanghai Composite Index systematically underperforms the Wind All A Index.

If you compare it with the world's major indices, you can also feel the gap in the distribution of industries. Based on January 2024 data, the top 10 heavy stocks in the Nikkei 225 Index are Fast Retailing (Uniqlo's parent company, 10.94%), Tokyo Electron (semiconductor equipment manufacturing, 7.67%), Advantest (semiconductor test equipment manufacturing 4.28%), SoftBank (VC 3.56%), KDDI (communication companies 2.7%), Shin-Etsu Chemical (2.7%), Daikin Industries (2.19%), TDK (Motors, 2.05%), Fanuc (Motors, 1.89%) ) and Terumo (precision instruments 1.85%), with a total weight of 38.83%; Not to mention the S&P 500, the top 10 companies by market capitalization are Microsoft, Apple, Nvidia, Google, Amazon, Facebook, Eli Lilly, Broadcom, Tesla and JPMorgan Chase, almost all of which are representatives of the new economy; The top 10 heavy stocks in the Shanghai Composite Index have a total weight of 23%, all of which are distributed in traditional industries such as banking, liquor, electric power, petroleum and petrochemical, and insurance.

At present, China's economy is switching between old and new drivers. If the weighting method is not changed, it is likely that it will be difficult for the Shanghai Composite Index to fully share the dividends of new momentum development in the next ten or two decades.

In summary, as a full-sample index weighted by total market capitalization, the Shanghai Composite Index has a high proportion of the old economy and is easily dragged down by the high valuation of new stocks, which is not the best indicator to measure the performance of A-shares. It's just that path dependence has been formed, and investors are used to the Shanghai Composite Index.

Come back and look at the 3,000-point question of the Shanghai Composite Index. The "3000 points curse" that everyone now knows is itself a misunderstanding, and "3000 points = bottom" is not always the case.

The Shanghai Composite Index started from 100 points, and only broke through 3000 points for the first time in March 2007, corresponding to a price-earnings ratio of about 42 times, at that time, 3000 points was a historical high, in an absolute overvalued state, as for the 6000 points that shareholders talked about, it corresponded to a price-earnings ratio of about 70 times at that time, which was a bubble in a bubble.

In July 2008, affected by the global financial crisis, the Shanghai Composite Index fell back below 3,000 points; In 2009, catalyzed by the 4 trillion stimulus policy, the Shanghai Composite Index temporarily returned to above 3,000 points, corresponding to a price-earnings ratio of about 26 times, but soon fell back; It was not until the new round of bull market in 2015 that the Shanghai Composite Index once again exceeded 3,000 points, corresponding to a price-earnings ratio of about 15 times at that time. After that, the bull market bubble burst, and the Shanghai Composite Index began to float around 3,000 points for a long time, and at the same time, 3,000 points gradually became a reasonable and undervalued point.

Recently, the Shanghai Composite Index fell back to 3,000 points again, corresponding to a price-to-earnings ratio of less than 13 times. In the world's major markets, the valuation is far lower than the S&P 500 index of 27 times and the Nikkei 225 index of 22 times, and only significantly higher than that of Hong Kong stocks, which is a veritable valuation depression.

It can be seen that the Shanghai Composite Index has repeatedly stood at 3,000 points in history, corresponding to very different valuation levels. Along the way, from bubbles, overestimation, reasonableness to the current underestimation, this 3,000 points is no longer the other 3,000 points.

From a valuation perspective, in October 2018, the Shanghai Composite Index was 2,600 points, and the price-to-earnings ratio was between 12-13 times; At present, the price-earnings ratio of the Shanghai Composite Index is also around 13 times, corresponding to a point of around 3,000 points. It can be seen that as the earnings of the constituent stocks continue to grow, time will push the index point upward.

In 2018, the bottom of the market corresponds to 2,600 points; Currently, the bottom of the market corresponds to 3000 points; In another three to five years, the bottom of the market may rise to 3,400 points, and at that time, we can probably safely say that the Shanghai Composite Index will never return to 3,000 points.

In this sense, will the Shanghai Composite Index fall below 3,000 points this time? It's possible, and it's not low.

Jim Rogers once said that every 10-15 years, the so-called common sense in the capital market is broken. We have reason to believe that the 3,000-point curse of the Shanghai Composite Index, as a "common sense", will soon become history.

Appendix: A brief introduction to several representative broad-based indices

1. CSI A50 Index: The 50 securities with the largest market capitalization are selected as index samples from the securities of leading listed companies in various industries to reflect the overall performance of the securities of the most representative leading listed companies in various industries. The selection criteria for industry leaders are to rank first in the average daily free float market value in the CSI Level 3 industry in the past year, and ensure that at least one stock is selected in each CSI Level 2 industry. The index sample is adjusted semi-annually, and the sample adjustment is implemented on the next trading day on the second Friday of June and December of each year. The weight of a single sample shall not exceed 10%, and the total weight of the top five samples shall not exceed 40%, and the weighting method shall be adjusted for market capitalization.

The CSI A50 Index is based on December 31, 2014 and is based on 1,000 points. Since the base date, the annualized return of the index (including dividends) is 5.83%. At present, the top 10 stocks of CSI A50 are Kweichow Moutai, CATL, Ping An of China, China Merchants Bank, Midea Group, Zijin Mining, Yangtze Power, BYD, Hengrui Pharmaceutical and CITIC Securities, with a total weight of 50.69%. It should be noted that the reason why it is China Merchants Bank and not ICBC is because China Merchants Bank has the largest free float market value in the listed banking industry.

2. CSI 300 Index: It is composed of the 300 most representative securities with large scale and good liquidity in the Shanghai and Shenzhen markets. In the selection of samples, in addition to considering liquidity factors, the top 300 securities are mainly selected as index samples according to the ranking of the average daily total market capitalization in the past year from high to low, and the weighting method is the weighted and graded free float market capitalization. The index sample is adjusted semi-annually and is implemented on the next trading day on the second Friday of June and December each year.

The CSI 300 Index is based on December 31, 2004, with a basis point of 1,000 points. Since the base date, the annualized return of the index (including dividends) is 8.75%. At present, the top 10 stocks in the CSI 300 Index are Kweichow Moutai, CATL, Ping An of China, China Merchants Bank, Midea Group, Zijin Mining, Wuliangye, Yangtze Power, Industrial Bank and BYD, with a total weight of 22.39%.

3. CSI 500 Index: It mainly excludes the sample of the CSI 300 Index and the top 300 securities in the average daily total market value in the past year, and ranks the remaining securities according to the average daily total market value in the past year from high to low, and selects the top 500 securities as the index sample, and the weighting method is the weighted and graded free float market capitalization. The index sample is adjusted semi-annually and is implemented on the next trading day on the second Friday of June and December each year.

The CSI 500 Index is based on December 31, 2004, with a basis point of 1,000 points. Since the base date, the annualized return of the index (including dividends) is 10.01%. At present, the top ten stocks in the CSI 500 Index are Xinyisheng, Siyuan Electric, Sailun Tire, Shenhuo, Western Mining, Tianfu Communication, GEM, Roborock, Yutong Bus and Chongqing Agricultural Commercial Bank, with a total weight of 6.09%.

[Note: The market is risky, and investment needs to be cautious.] In any case, the information or opinions expressed herein are for an exchange of views only and do not constitute investment advice to any person. 】

This article was originally written by the official account "Xue Hongyan Whisper", and the author is Xue Hongyan, vice president of Xingtu Financial Research Institute

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