Wu Xin says she's got a sure-fire plan to recoup losses from the US$4 trillion sell-off in China's stock market - pile into equities that hurt her the most.
The 28-year-old from Hangzhou has been snapping up shares in China's small cap ChiNext Index, undeterred by a plunge this year that erased half the measure's value in three months.
"I lost most of my money investing in ChiNext stocks, but they are still worth buying," said Ms Wu, an ad saleswoman in the media sector. "I can make the most money from them in a rally, too."
Doubling up on the most volatile equities has become a go-to strategy for many of China's 96 million individual investors as the stock market shows early signs of recovery. The ChiNext has rallied 38 per cent from this year's low in September - three times as much as the benchmark Shanghai Composite Index - and volumes on the small-cap bourse surged to an all-time high last month.
The rush back into the bear market's biggest losers shows Chinese investors are still embracing risk, even as the economy heads for its weakest annual expansion since 1990. The danger is that another market downturn could saddle individuals with even deeper losses - a double whammy that Bocom International Holdings says could do lasting damage to investors' appetite for stocks.
"If the ChiNext plunges again, it's going to hurt,'' said Hao Hong, the chief China strategist at Bocom in Hong Kong, who predicted the stock-market rout in June.
When small-cap shares are rising this fast, buying is hard to resist. Zhu Zujuan, a 60-year-old retiree, says she purchased shares of Dingli Communications, a maker of wireless network testing gear, last Tuesday at 27.2 yuan apiece. After a tea date with friends, she came back home to find the stock had rallied to 30 yuan - a 10 per cent gain in a few hours, without any obvious news.
"The market cap of ChiNext stocks is usually small, so it is easy for them to rise," Ms Zhu said from Hangzhou. "I know the risk is high, but so is the return."
The ChiNext's rally from its September low has extended this year's gain to 68 per cent, despite a crash of as much as 55 per cent from its June peak.
Investors are increasingly trying to lock in quick gains. Average daily turnover in ChiNext shares surged 64 per cent in October from the previous month, with about 3.5 per cent of the entire market capitalisation changing hands on October 23. That was a record proportion relative to Shanghai, where turnover amounted to 1.5 per cent of the bourse's market value.
Pan Lizhi, a 55-year-old retiree who has as much as 50,000 yuan (Dh28,984) in ChiNext shares, says she never hangs on to a stock for more than five days. Despite losing sleep when equity prices plummeted this year, she still has about a third of her holdings in small caps.
"I only make speculative investments in ChiNext," Ms Pan said from Yiyang, a city in China's southern Hunan province. "I always rely on feelings when buying stocks. My son says I'm a gambler."
Of course, ChiNext shares aren't all about short-term speculation. The index is a proxy for "new economy" companies in the technology, consumer and service industries - some of the biggest beneficiaries of China's plan to wean itself from a reliance on credit-fuelled investment. Earnings at ChiNext companies have jumped 54 per cent since the end of 2013, versus a 1 per cent drop for the Shanghai Composite, according to Bloomberg data.
"Regardless of all the criticism about ChiNext stocks, they are mostly in the new emerging industries," said Yin Ming, a vice president at Shanghai-based Baptized Capital. His firm invests in environmental protection companies because their earnings have "high visibility" as local governments boost spending on the industry.
For Bocom's Mr Hong, valuations on ChiNext stocks already reflect the companies' long-term growth prospects. The index trades for 71 times reported profits, versus 17 for the Shanghai Composite. America's small-cap Russell 2000 Index has a multiple of 19.
"I wouldn't be surprised if the ChiNext underperforms," Mr Hong said. "It is expensive."
Liu Zongyuan, who works for an engineering logistics company in Beijing, says Chinese stocks have further to fall as the economy slows. Yet despite his bearish outlook, the 30-year- old has as much as half of his investments in ChiNext shares. The key, he says, is to aim for fast gains and know when to cash out.
"I sell immediately when I think the profit is good enough," Mr Liu said. "I've recently made more speculative investments than fundamental-based ones, because I'd like to make quick profits."
MSCI index to include Chinese ADRs
The index provider's decision in June not to include domestically-listed China stocks, known as A-shares, in its global indexes, which are tracked by equity funds holding trillions of dollars, contributed to a sharp sell-off, prompting Chinese authorities to launch a heavy-handed rescue operation.
The inclusion of overseas-listed China shares, known as American Depositary Receipts (ADR), will be the first test of foreign demand for greater exposure to China since its markets returned to an even keel after a stormy summer.
Beijing wants to encourage more overseas capital into the mainland's financial markets, but foreign investors took a dim view of the market distortion caused by the government-directed intervention. Chinese shares listed on overseas markets, however, are not affected by such measures.
"Not only do they offer a great way to get into China businesses that are geared towards the consumption story, [but also] being listed in the US means they are prevented from the kind of manipulation we have seen in the China markets over the summer," said Marc Chandler, global head of FX strategy at Brown Brothers Harriman.
Analysts estimate the index rebalancing will trigger up to US$70 billion in total flows into these stocks over the next six months and increase China's weight in the MSCI Emerging Market (MSCI EM) index, which only includes Chinese stocks listed in Hong Kong, to more than 26 per cent from just over 23 per cent.
Investors welcomed the move, which will give them exposure to US-listed tech giants like Alibaba and Baidu, which are more geared to China's domestic consumption, which is still rising even as other parts of the economy, such as manufacturing, struggle.
"These are new-economy, creative companies, and investors will be excited about that, in stark contrast to many Chinese-listed shares that are more traditional state-owned-enterprise-type firms," said Arthur Kwong, head of Asia Pacific equities at fund manager BNP Paribas Investment Partners in Hong Kong, who manages $1.8bn in assets.
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