Since the beginning of this year, the micro-cap index has risen by more than 40% this year, which greatly exceeds many people's expectations. So why have micro-cap stocks performed so well this year?Can the performance of micro-cap stocks be sustained?
1. The income of micro-cap stocks comes from **?
The change can be broken down into two parts: the change in EPS and the change in PE, i.e. the company's earnings and the company's valuation. Guohai ** compared the difference in growth and earnings quality of the ** stocks of micro-cap stocks, and found that the growth rate of micro-cap stocks ** is worse in terms of ROE, net profit growth rate, and analyst consensus expected growth rate, and the gap between large and small cap stocks on PB is not large. Micro-cap stocks** have worse growth than ***, and their value attributes are roughly the same.
Therefore, we can conclude that micro-cap stocks can have better performance, mainly driven by PE at the valuation end, while EPS on the performance side has no advantage over ** stocks, and even the performance of ** stocks is more prominent. So why is it that valuations are still surging when the performance is not as good as other sectors?
1) Excess liquidity spills over to microcaps.
Since 2013, there has been a four-year rotation cycle of large- and small-cap styles in A-shares. From 2013 to 2016 and 2021 to the present, it is an obvious small-cap style, and these times have shown a background of strong downward pressure on the economy and a loose liquidity environment. Micro-cap stocks are small-cap stocks within small-cap stocks, which are smaller and more flexible.
In order to cope with the downward pressure on the economy, the monetary authorities tend to adopt a loose monetary policy, which can observe the upward trend of residual liquidity, the year-on-year decline of PPI, and the year-on-year decline of social finance. In the current round of micro-caps**, residual liquidity rose from -11% at the start of 2022 to 52%。
2) There is a negative correlation between the degree of public offering and micro-cap stocks.
The public offering holdings are dominated by companies with good quality, while the allocation of micro-cap stocks with small scale, unstable growth rate and earnings quality needs to be improved. Taking the market value of the top 50 heavy positions in the public offering as the ** index, this indicator can depict the degree of public offering**. Guohai** found that there was a significant negative correlation between the change rate of the degree of huddle and the excess return beta of small and micro disks**, and the correlation coefficient reached -069。That is, the higher the degree of institutional grouping, the smaller the excess return of micro-cap stocks.
3) The proportion of foreign ownership is low, and the interest rate of US Treasury bonds is high, but it has little impact on micro-cap stocks.
Due to the high requirements for the quality of the company, foreign investors have less investment in micro-cap stocks. In addition, micro-cap stocks are too small to be cost-effective, so micro-cap stocks are relatively less affected by overseas liquidity. However, ** stocks with a relatively high proportion of foreign holdings are greatly affected by the withdrawal of foreign capital.
2. Can the earnings of micro-cap stocks continue?
In the previous section, we talked about the alpha of micro-cap stocks: liquidity spillovers, the collapse of public offerings, and foreign capital outflows. If you want to know whether the earnings of micro-cap stocks can be sustained, it depends on whether these three points will change.
1) From the perspective of liquidity, the downward pressure on real estate and exports is still large, so the possibility of contractionary policies is low. A data can show that from January to October, the sales area of commercial housing was 925.79 million square meters, a year-on-year decrease of 78%, of which residential sales area decreased by 68%。The sales of commercial buildings were 9,716.1 billion yuan, down by 49%, of which residential sales fell by 37%。
2) From the perspective of the degree of public offering, it is still in the cycle of the collapse of the public offering. Since the beginning of this year, the scale of **type** has only grown very slightly, and most of the growth comes from ETFs, and the scale of hybrid ** is even in the contraction stage, and most active equity** has not held the pricing power, and this trend cannot be changed at present.
Public offering**huddle degree**Guohai**.
3) From the point of view of foreign capital, we skip this topic.
III. Epilogue
It seems that liquidity, public offering and foreign capital are three different factors, but in fact, the essence is the sameExpectations for the Chinese economy
If the domestic economy can return to growth expectations, then liquidity will re-gather on good companies, and everyone's expectations for public offerings can gradually come back (after all, public offerings are much stronger than the ability to pick good companies), and foreign capital is also the existence of eating and not remembering.
Just remember, by that time, you'll have to expect less from micro-caps. After all, everything is cycles and reincarnations.
ps.Tomorrow we'll discuss which micro-cap stocks to keep an eye on.
Reference: Micro-cap style expected to continue, Guotai Junan**, August 2023.
Is the excess in micro-cap stocks still sustainable?Guohai**, November 2023.
The Other End of the Barbell Strategy: The Mystery of Micro-Cap Stock Investment", GF**, October 2023.