The epidemic is so bad, shares will plunge?

As we all know, the epidemic has recently spread across the country and the situation is quite bad, with medical resources being squeezed in many places.

Some people might just say the epidemic is so bad; the big a shares will surely plummet too!

I advise people not to have such a view.

In fact, as far as I am concerned, in terms of the CSI 300 index, A-shares bottomed out at the end of October, and it would be hard to see another 10%+ plunge.


Using data from the past 10 years, I have made a model of the CSI 300 index here – the red line in the chart below is the real CSI 300 index monthly point, while the green line is the CSI 300 “fair point” simulated according to the financial data released by the central bank every month “.

It has long been my belief that the direction of China’s stock market (the earnings of listed companies) depends on two main forces.

External exports

Domestic credit

In the article “The effect of hiding foreign exchange in the people”, I mentioned that the movement of the CSI 300 index is closely related to the amount of foreign exchange deposits of the residents according to the financial institutions (see the chart below). I personally believe that this data represents the thickness of the wallets of the majority of Chinese “small bosses”, and also represents the accumulation and confidence of China’s export trade, if these small bosses are “rich”, the money will most likely enter the stock market, thus driving the stock market up.

On the other hand, in the era of credit money, the nominal RMB-denominated earnings of listed companies are also closely related to the medium- and long-term credit counted by the People’s Bank of China. The increase in medium- and long-term credit of the whole society means that there is more money in the society in the long term, and everyone has money to buy, so the nominal earnings of listed companies will naturally rise; furthermore, the money in the society will naturally enter the stock market.

According to my analysis of the data, just in the last 10 years or so, the growth rate of medium and long-term credit of enterprises (business) announced by the central mom every month is closely related to the CSI 300 index, and is usually 1-3 months ahead of the performance of the CSI 300 index.

Based on the accumulation of foreign exchange deposits in financial institutions and also the growth rate of domestic credit, I designed a model of the CSI 300 index (see the first graph), using the model to simulate the CSI 300 index, which can be compared with the real CSI 300 points to see whether it matches the current financial data, underestimated or overestimated.

As you can see in the first graph, the current real CSI 300 index, basically, matches the simulated points.

(Note: I will talk more about the model design and application of the CSI 300 index in the next investment course).

What’s more, both the amount of foreign exchange deposits in financial institutions and the growth rate of medium- and long-term corporate credit are either on their way back up or have largely stabilized, which means the likelihood of another big drop in A-shares is extremely low.


Needless to say, if the epidemic has a more negative impact on the economy, the Chinese government and the central bank, most likely, will also lower interest rates and quotas, and even Chinese QE money printing is not out of the question.It is based on this situation; I personally believe that the space for shares to fall has been very low.

On the other hand, the CSI 300 index is still much undervalued in terms of the long-term earnings of the companies included in the index.

The CSI 300 Index is almost a collection of the largest and strongest companies in the Chinese economy today. As long as the Chinese economy can continue to develop, the CSI 300 can basically rise in tandem.

Think of the CSI 300 as a company tracking its Earnings per Share (EPS) for the past four quarters (Trailing Twelve Months, TTM) at $340, which, by the end of 2021, is already after a decline from a high of $371.

The relative high point of EPS of CSI 300 in late 2007 and early 2008 was in the range of 124-140 Yuan.

Let’s estimate the annualized EPS growth rate of CSI 300 in the past 15 years using the most conservative method by using the data of the interval between the relative high of 140 Yuan in 2007 and the current relative low of 340 Yuan (see the chart below).


The answer is: 6%.

Obviously, 6% is a growth rate that does not keep up with the real growth rate of China’s GDP over the past 15 years, and is far below the growth rate of RMB broad money M2.

Nevertheless, we still take the 6% growth rate as a criterion for high EPS growth in the future of the CSI 300 Index, and use this criterion to estimate a reasonable point of high economic growth in the future for the CSI 300 Index.

In addition to high growth, we also have to consider that China’s future long-term real economic growth rate will probably decline to a level of about 4%, and the EPS growth rate of the CSI 300 Index will probably also decline to 4%, and then we use this growth rate of 4% to estimate a reasonable point for the CSI 300 Index in the future low economic growth.

In the last 10 years or so, the valuation of CSI 300 index has been moving in the range of 10-15 times PE for the vast majority of the time. We may consider 10x valuation as a low valuation point and 15x valuation as a high valuation point (see the chart below) as a way to deduce whether the current price level is appropriate.

Using the Dharma-Darin story-valuation approach, we can add up the possible EPS of CSI 300 in the next 10-15 years to find out whether the valuation of CSI 300 is reasonable at the current stage.

According to this table above, the current CSI 300 index, even with 4% EPS growth rate, should be above 4,000 points at a reasonable price according to the 10 times low valuation.

Against the reality of the CSI 300 index, it has been bobbing between 3800-3900 points for quite some time.

Although the current proliferation of the new crown virus has had a very bad impact on the economy, a place like the stock market is a place for long-term valuation of assets, not a momentary point.

Since this table above has taken into account all the possibilities of the economy being bad next that means that even if the spread of the epidemic is pretty bad at this stage, it’s basically impossible for A-shares to plummet.



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