By Clement Tan
HONG KONG, Oct 9 (Reuters) – When it comes to mainland Chinese stocks this year, small is hot.
Up nearly 80 percent in 2013, Shenzhen-listed penny stocks have outperformed a moribund broader market in a big way. But fears are growing that the market is looking ripe for a correction.
Retail investors chasing outsized returns have aggressively pushed small-cap stocks higher, which is much harder to do on large-cap stocks. There are signs that institutional investors are also in the game, prodding penny stocks to record highs.
However, concerns are growing that stock valuations have gone too far ahead of earnings. Investors would also be disappointed if their high expectations of major economic reforms are not met when the ruling Communist Party holds its key policy meeting in November.
The Nasdaq-styled ChiNext Composite Index of mainly high growth, high tech counters listed in Shenzhen and only came into being in 2010, is now trading at 55 times its price-to-earnings (PE) ratio.
This is almost four times the 14.8 times PE ratio that the CSI300 of the biggest Shanghai and Shenzhen A-share listings, which is down about 3 percent on the year. Mid-cap counters have also similarly outperformed.
“It’s definitely a bubble for some of these small-caps, but not true for all of them,” Heather Hsu, CLSA-Fortune Securities A-share strategist, told an investment conference in Hong Kong late last month.