The darkness before the dawn, too dark!

3000 points, after all, broke.

Some people turned out the Shanghai Securities News in April 2008, as a way to mock the A-share, 14 years Nance a dream, to 2022, still “defend 3000 points”.

Because of the design of the SSE index, the SSE index is a much distorted reflection of the stock market; in fact, we cannot deny that, except for a very small number of stocks, the majority of A-share prices are now much higher than in April 2008.

Relatively speaking, I prefer to use the P/E ratio of the CSI 300 index or the spread of stocks and bonds to judge the real position of the big A-shares.

For example, using the rolling P/E ratio (TTM, past 12 months earnings) of the CSI 300 index, A-share valuations have been less than 10x, especially after today’s selloff, and have been close to 9.5x, and A-share valuations have never been this low except for the mid-2013 – late 2014 period.

If it still feels like the rolling P/E ratio is a bit all about the whole and not the individual, then we can look at the median rolling P/E ratio of the CSI 300 index, which has now fallen below 18x, historically matched only by October-December 2008, December 2011-January 2012, and September-October 2018.

The chart below shows the rolling P/E ratio and the median rolling P/E ratio of the CSI 300 since 2005.

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In addition to looking directly at the P/E ratio, we should also look at the stock-bond spread.

There are two kinds of “stock-bond spreads”: one is the stock’s earnings rate minus the 10-year Treasury yield, and the other is the 10-year Treasury yield minus the stock’s dividend yield. Because the 10-year Treasury yield is a risk-free yield, the

The former, represents the case where the stock’s earnings rate is higher than the risk-free rate of return, with higher values of this value implying that the stock is more undervalued.

The latter, represents the case where the risk-free rate of return is higher than the stock dividend rate, and the lower the value, the more undervalued the stock is.

It is the relative valuation return where the stock earnings rate is higher than the risk-free yield, and we can see that the value has exceeded 2 times the standard deviation of the average stock-bond spread over the past 10 years, showing the undervaluation of the CSI 300 index from historical data.

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The chart below, which shows the risk-free return above the CSI 300 stock dividend yield, likewise shows the extreme undervaluation of the CSI 300 Index – if we take into account today’s stock market crash, since April 2008 to date, only August 2015, January 2019 and March 2022 are close to the present.

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Simply summarizing the historical data with the above indicators, we can be almost 100% sure that

A-shares are now priced at an extremely low point.

Now, perhaps, is the last darkness before the dawn for A-shares.

To conclude the article, I would like to offer you another particularly interesting perspective.

Over the past 10 years, whenever gold and A-shares have fallen together, the price of gold has always reached the bottom ahead of our A-shares, sometimes by 1-5 days, sometimes by about 1-4 weeks, but definitely ahead of our A-shares!

 

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