To The Moon

A-share market overall valuations have dropped below their historical average, with the CSI 300 equity risk premium at last week's low rising above one standard deviation above the historical mean, a level that has historically corresponded to multiple low-point zones for the index. Current A-share valuations suggest the market may already be at an oversold or overly pessimistic level.

Recently, the A-share market has experienced significant volatility, with overall valuations declining again and trading volume shrinking rapidly. In its report titled "Short-Term Headwinds Are Strong, Waiting for Positive Signals" published on October 15, CICC noted that external disruptions and funding pressures have combined, and the short-term market is awaiting positive signals. However, domestic fundamentals and medium-term logic remain unchanged, and the A-share market is still expected to continue its long-term, steady progress trend.

Key Observations from CICC

In the second half of this year, China's capital markets experienced a relatively large correction. The CSI 300, ChiNext Index, Hang Seng Index, and Hang Seng Tech Index have cumulatively declined 20.2%, 41.1%, 18.9%, and 35.8% respectively from their year-to-date highs, with year-to-date returns all turning negative. Some leading companies have fallen back to near their "924" levels. CICC believes that after significant adjustments, overall A-share valuations have dropped below their historical average, offering good investment appeal from both horizontal and vertical comparisons. Specifically:

Overall A-Share Valuations Have Fallen Below Historical Averages

A-share market overall valuations have dropped below their historical average, and at last week's low, the CSI 300 equity risk premium rose above one standard deviation above the historical mean, corresponding to multiple historical low-point zones for the index. According to Wind data, as of October 23: 1) In the A-share market, the CSI 300 forward price-to-earnings ratio stood at 11.9x and forward price-to-book ratio at 1.1x, below the past decade's historical averages of 12.1x and 1.2x, and down 19.0% and 15.5% from year-to-date highs of 14.7x and 1.3x. The CSI 300 equity risk premium reached 6.2%, having risen above one standard deviation above the historical mean. Historical experience shows that when this indicator rises to this level, it has repeatedly corresponded to low-point phases in the A-share market. 2) In the Hong Kong stock market, the MSCI China ex-A-shares index forward P/E was 8.2x and forward P/B was 0.8x, near one and 1.1 standard deviations below their historical means respectively. The Hang Seng Index forward P/E and forward P/B were 10.5x and 1.2x, below historical averages. The Hang Seng Tech forward P/E and forward P/B were 18.7x and 1.8x, at 0.9 and 1.1 standard deviations below historical means.

ChiNext Valuations at Historically Extreme Levels

The ChiNext Index P/E has reached a historically extreme position, at one point approaching the levels seen around the "924" period in 2024. Many weighted companies in the ChiNext Index are in a boom phase. After significant corrections, the index's forward P/E now stands at 22.9x, below 1.2 standard deviations from the historical mean, at the 4.7th percentile over the past decade. The equity risk premium is 1.6%, above 1.7 standard deviations from the past decade's historical mean, both approaching levels seen around the "924" period and at historically extreme levels.

Small-Cap Relative Valuations Have Declined

Small-cap relative valuations versus large-caps have declined, and the previously notable local overvaluation of small-caps has been significantly alleviated. In mid-year, A-shares briefly showed structural overvaluation, with small-cap valuations being relatively high. However, with recent market adjustments, small-cap relative valuations versus large-caps have declined. The CSI 1000/CSI 300 trailing P/E ratio fell from a year-to-date high of 3.9 to 3.0, and the latest P/B ratio fell from 2.0 to 1.6. The CSI 500/CSI 300 trailing P/E ratio fell from a year-to-date high of 2.9 to 2.3, and the latest P/B ratio fell from 1.9 to 1.6.

Most Sector Valuations Below Historical Averages

The majority of sectors' P/E TTM ratios have fallen below their historical averages. Among them, sectors including non-bank financials, non-ferrous metals, food and beverage, power equipment, beauty and personal care, and media have P/E valuations below the 25th percentile since 2010. Sectors with current P/E ratios exceeding historical averages include agriculture, forestry, animal husbandry and fishery, building materials, computers, automobiles, machinery and equipment, and coal.

Cross-Asset Comparison: Relative Appeal of Stocks vs. Bonds at Historical Highs

The current 10-year government bond yield is 1.6%, at a historically low level, while A-share dividend yields have risen amid capital market development and market corrections. The stock-bond relative appeal index, calculated based on dividend yields and government bond yields, currently stands at 184%, above the 90th percentile over the past five years, with the relative cost-effectiveness of equity assets at a historical high.

International Comparison: A-Share Valuations Significantly Low Globally

A-share overall valuations are notably low among major global markets, offering good investment appeal. The current CSI 300 forward P/E is approximately 11.9x, and the Hong Kong Hang Seng Index valuation is 10.5x, significantly below the United States (S&P 500, 21.0x), Japan (Nikkei 225, 20.3x), India (SENSEX 30, 17.8x), and Europe (Stoxx 600, 13.8x) according to Bloomberg data.

Current A-Share Valuations Reflect Potentially Oversold or Overly Pessimistic Levels

Recently, the A-share market has experienced significant volatility, with overall valuations declining again and trading volume shrinking rapidly. In its report titled "Short-Term Headwinds Are Strong, Waiting for Positive Signals" published on October 15, CICC noted that external disruptions and funding pressures have combined, and the short-term market is awaiting positive signals. However, domestic fundamentals and medium-term logic remain unchanged, and the A-share market is still expected to continue its long-term, steady progress trend.

Last week's Financial Street Forum Annual Meeting outlined arrangements around market stabilization mechanisms, investment-side reforms, and liquidity support, sending positive policy signals to the market, which will help gradually stabilize market expectations and boost investor confidence.

A-share overall valuations are already at historically low levels, with some technology sectors' valuations returning to historically extreme low levels, significantly enhancing medium-term investment appeal. The supporting logic for A-shares from the global monetary order restructuring and technology narrative remains unchanged, and there is no need to be overly pessimistic.

Allocation: Return to the "Barbell Structure"

In its report titled "Return to the Barbell Structure?" published on October 12, CICC argued that in an environment characterized by limited aggregate growth elasticity, coexistence of structural high prosperity and increased market risk appetite volatility, the "technology + dividend" barbell structure is expected to become an allocation choice that balances earnings growth elasticity, shareholder cash returns, and portfolio stability.

Recently, two main themes are worth watching: 1) Areas where third-quarter earnings growth is improving quarter-over-quarter, such as some upstream non-ferrous metals and technology hardware benefiting from AI prosperity and overseas demand. 2) High-dividend assets: with domestic long-end interest rates at historically low levels, listed companies maintaining overall dividend yields and payout scales, and the relative appeal of stocks versus bonds rising, high-dividend sectors have once again become an important choice for capital allocation.