Stocks: Losers and Gainers

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Buffett Indicator: China Stock Market Valuations and Expected Future Returns

Updated at Tue, 19 Jan 2021 20:30:05 -0600
Country: China (updated daily) check out Global Overview for detailed methodology.

The Stock Market is Modestly Overvalued.

Ratio of total market cap over GDP: Recent 10 Year Maximum - 93.1%; Recent 10 Year Minimum - 38.54%; current - 67.04%
Expected future annual return: 5.3%

ETF Used for dividend yield: MCHI (Yield=0.98%)
Market Index used: Shanghai Composite Index
Current Annual GDP: $15,899 billion US dollars or 102,813 in billions of national currency (GDP in Local Current Prices Annual Growth=5.85%)
Data since year 1990


China Historical GDP Growth

Historical GDP of China in billions of national currency. The GDP in local current prices has grown at the annual rate of 5.85% over the past 8 years. Please note this growth rate includes the effect of price inflation and it is NOT the real GDP growth rate. Current Annual GDP: $15,899 billion US dollars or 102,813 in billions of national currency.

China GDP (Billion, National Currency)

Historical Stock Market Cap

Historical total market of China in billions of national currency. This value is normalized using the data published by WorldBank. Shanghai Composite Index is used for the normalization. It is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange.

China Total Market Cap (Billion, National Currency)

Historical Ratio of Total Market Cap over GDP (%)

The current ratio of total market cap over GDP for China is 67.04%. The recent 10 year high was 93.1%; the recent 10 low was 38.54%. If we assume that the ratio will reverse to the recent 10 years mean of 59.14% over the next 8 years, the contribution to expected annual return is -1.56%. This is the detailed historical chart of the ratio.

China Ratio of Total Market Cap over GDP (%)

Based on these historical valuations, we have divided market valuation into five zones:

Ratio = Total Market Cap / GDP Valuation
Ratio ≤ 41% Significantly Undervalued
41% < Ratio ≤ 53% Modestly Undervalued
53% < Ratio ≤ 65% Fair Valued
65% < Ratio ≤ 77% Modestly Overvalued
Ratio > 77% Significantly Overvalued
Where are we today (2021-01-20)? Ratio = 67.04%, Modestly Overvalued

Predicted and Actual Returns

From the equation presented on the U.S. market valuation page,

Investment Return (%) = Dividend Yield (%) + Business Growth (%) + (Re/Rb)(1/T)-1

We can compute the predicted and actual returns of the China stock market over a given time period, T. In the calculation, we set T to equal eight years, the approximate length of a full economic cycle. The calculated results are presented in the chart below. The green line indicates the expected, or predicted return if the market ratio trends near the recent 10 years average ratio of 59.14% over the next eight years.

The blue line indicates the actual, annualized return of the China stock market over eight years. We use “Shanghai Composite Index” to do the actual return calculation. We can see the calculations largely predicted the trend in the stock market as the blue line is closely parallel to the green line.

Predicted and Actual Returns of China

Conclusion

The stock market of China is expected to return 5.3% a year for the coming years. This is from the contribution of economic growth in local current prices: 5.85%, Dividend Yield: 0.98% and valuation reverse to the mean -1.56%.

This is the projected return of the stock market in China relative to other countries. Click on each bar in the chart to go to other countries:


You can go here to see what international stocks Gurus are buying.

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