CICC: Where have valuations adjusted to?

CICC released a research report stating that the overall valuation of the A-share market has fallen below the historical average. At last week's low, the CSI 300 equity risk premium had risen to more than one standard deviation above the historical average, corresponding to the index's historical low-level ranges on multiple occasions. Current A-share valuations reflect that the market may already be at an oversold or overly pessimistic level. Recently, the A-share market has been highly volatile, overall valuations have declined again, and trading volume has contracted rapidly. In its October 15 report "Short-term 'headwinds' are strong; wait for positive signals," CICC pointed out that with external disturbances and funding pressures overlapping, the short-term market is waiting for positive signals, while domestic fundamentals and medium-term logic have not changed, and the A-share market is still expected to continue its long-term, steady-advance trend. CICC's main views are as follows: In the second half of this year, China's capital market has corrected significantly. The CSI 300/ChiNext Index/Hang Seng Index/Hang Seng Tech Index have respectively fallen 20.2%/41.1%/18.9%/35.8% cumulatively from their highs for the year, with year-to-date returns all turning negative, and some leading companies having corrected to close to the "924" level. CICC believes that after the notable adjustment, overall A-share valuations have fallen below the historical average, and both cross-sectional/longitudinal comparisons show good investment appeal. Specifically: Overall A-share market valuations have fallen below the historical average. At last week's low, the CSI 300 equity risk premium had risen to more than one standard deviation above the historical average, corresponding to the index's historical low-level ranges on multiple occasions. According to Wind data, as of October 23: 1) In the A-share market, the CSI 300 forward P/E ratio was 11.9x and the forward P/B ratio was 1.1x, below the historical averages of the past ten years (12.1x and 1.2x), and down 19.0% and 15.5% from the highs for the year (14.7x and 1.3x). The CSI 300 equity risk premium was 6.2%, having risen to more than one standard deviation above the historical average. Historical experience shows that when this indicator rises to this level, it has often corresponded to low-level phases in the A-share market. 2) In the Hong Kong market, the MSCI China ex-A-share Index forward P/E ratio was 8.2x and the forward P/B ratio was 0.8x, near one standard deviation and 1.1 standard deviations below the historical average, respectively. The Hang Seng Index forward P/E and forward P/B ratios were 10.5x/1.2x, below the historical averages; the Hang Seng Tech Index forward P/E and forward P/B ratios were 18.7x/1.8x, at 0.9/1.1 standard deviations below the historical average. The ChiNext Index P/E ratio has reached a historically extreme level, at its low once approaching the level near the "924" in 2024. Many weighted companies in the ChiNext Index are in a boom phase. After the notable correction, the index's forward P/E ratio is now 22.9x, 1.2 standard deviations below the historical average and at the 4.7th percentile over the past ten years; the equity risk premium is 1.6%, 1.7 standard deviations above the historical average of the past ten years. Both are close to the level near "924" and at historically extreme levels. Small-cap valuations relative to large caps have declined, and the previously evident localized overvaluation of small caps has eased significantly. In the middle of this year, structural overvaluation briefly appeared in the A-share market, with small-cap valuations on the high side, but with the recent market adjustment, small-cap valuations relative to large caps have declined somewhat. The CSI 1000/CSI 300 trailing P/E ratio fell from a high of 3.9 for the year to 3.0, and the LF P/B ratio fell from 2.0 to 1.6; the CSI 500/CSI 300 trailing P/E ratio fell from a high of 2.9 for the year to 2.3, and the LF P/B ratio fell from 1.9 to 1.6. Valuation levels in most industries are now below historical averages. The trailing P/E ratios of most industries are below historical averages. Among them, sectors such as non-bank financials, non-ferrous metals, food and beverage, power equipment, beauty care, and media have P/E valuations below the 25th percentile of history (since 2010). Industries whose current P/E ratios exceed historical averages include agriculture, forestry, animal husbandry and fishery, building materials, computers, automobiles, machinery and equipment, and coal. Cross-asset comparison: the relative appeal of equities versus bonds has risen to a historically high level. The current 10-year government bond yield is 1.6%, at a historical low, while A-share dividend yields have rebounded somewhat due to capital market development combined with the market correction. The equity-bond relative appeal index calculated based on dividend yields and government bond yields is currently 184%, above the 90th percentile of the past five years, and the relative cost-effectiveness of equity assets is at a historical high. International comparison: overall A-share valuations are clearly low among major global markets and offer good investment appeal. The current CSI 300 forward P/E ratio is about 11.9x, and the Hong Kong Hang Seng Index valuation is 10.5x, clearly lower than major global markets such as the United States (S&P 500, 21.0x), Japan (Nikkei 225, 20.3x), India (SENSEX30, 17.8x), and Europe (Stoxx600, 13.8x), according to Bloomberg data. Current A-share valuations reflect that the market may already be at an oversold or overly pessimistic level. Recently, the A-share market has been highly volatile, overall valuations have declined again, and trading volume has contracted rapidly. In its October 15 report "Short-term 'headwinds' are strong; wait for positive signals," CICC pointed out that with external disturbances and funding pressures overlapping, the short-term market is waiting for positive signals, while domestic fundamentals and medium-term logic have not changed, and the A-share market is still expected to continue its long-term, steady-advance trend. Last week, the annual meeting of the Financial Street Holdings forum centered on arrangements for market stabilization mechanisms, investment-side reform, and liquidity support, releasing positive policy signals to the market, which will help gradually stabilize market expectations and boost investor confidence. Overall A-share valuations are already at a historically low level, and in particular valuations in some technology sectors have returned to historically extreme low levels. Medium-term investment appeal has increased significantly. At present, the supporting logic for A-shares from the restructuring of the global monetary order and the technology narrative has not changed, and there is no need to be overly pessimistic. On allocation, return to a "barbell structure." In its October 12 report "Return to a barbell structure?", CICC argued that in an environment of limited aggregate growth elasticity, the coexistence of structural high prosperity and increased volatility in market risk appetite, a "technology + dividend" barbell structure is expected to become an allocation choice that balances earnings growth elasticity, shareholder cash returns, and portfolio stability. Near term, focus on two main lines: 1) Areas with quarter-on-quarter improvement in third-quarter earnings growth: for example, some upstream non-ferrous metals, and technology hardware benefiting from the AI boom and overseas demand. 2) High-dividend assets: domestic long-end interest rates are at historical lows, listed companies overall maintain dividend yields and dividend scale, the relative appeal of equities versus bonds is rising, and high-dividend sectors have once again become an important choice for capital allocation.