Chinese Stocks Diverge Based On Market Cap

Just like in the US where large caps have been outperforming their smaller-cap peers recently, we’re seeing signs of the same trend playing out in the Chinese equity market as well; especially since the recent highs in January. For starters, though, it’s pretty amazing to think that China’s Shanghai Composite Index is down just 7% from its recent highs. With a large percentage of the country’s citizens virtually under house arrest and many businesses and factories across the country closed, a 7% decline seems like a walk in the park. Admittedly, those declines were a lot steeper at this time last week, but the magnitude of the bounce, even if it was aided by government stimulus, is impressive.

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While the Shanghai Composite is down just 7%, the average stock in the index is down a full percentage point more at 8.13%. Looking at how stocks have performed based on market cap shows that there has been a clear relationship between size and performance. The chart below shows the average performance of the approximately 1,500 stocks in the Shanghai Composite Index since the close on 1/17 grouped by decile according to market cap. While the decile of the largest stocks in the Shanghai Composite is down less than 5%, the three deciles with the smallest components are all down 11% or more.

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When looking at the percentage of stocks in each decile with positive returns since 1/17, it’s a similar picture as a higher percentage of larger components in the index have seen positive returns than their smaller peers. Whereas more than 21% of the Shanghai Composite Index’s components have had positive returns since 1/17, barely 2% of the Shanghai Composite’s smallest 150 components are positive during that span. 

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