Why Aren’t S-Chips Soaring Like The Shanghai And Shenzhen Stock Market?

China’s major stock market indexes, the Shanghai New Composite Index and the Shenzhen Stock Exchange Composite Index, have been soaring.

Over the past 12 months, the former has gained 89% while the latter has returned 93%; these figures have come even after both indexes have declined by around 30% since hitting a multi-year high in June this year.

But while Chinese stocks can legitimately said to have been soaring over the last year, many of the major S-Chips (S-Chips are a term used to describe China-based companies that are listed in Singapore), such as COSCO Corporation (Singapore) Limited (SGX: F83) and Yanlord Land Group Limited  (SGX: Z25), have not seen any major improvement in their share prices. What gives?

The dichotomy in the performance between the S-chips and the China-listed shares could be a sign that the volatile swings in the Chinese stock market are possibly fueled mainly by speculative bets that do not give much regard to the  business fundamentals of the China-listed companies.

To this point, it has been heavily reported that the Chinese stock market rally is, at least partly, the result of a huge rise in margin debt being taken on by investors to buy stocks. According to a report by The Guardian, total margin debt in China may be as much as 4 trillion yuan (US$645 billion) at the moment.

But whatever the driving forces may be for the ascent of Chinese stocks, the very fact that shares of both Cosco and Yanlord Land have not joined in the frenzy that is the Chinese stock market might actually be a source of relief for investors in Singapore.

If we were to look at the business results of both Cosco and Yanlord Land, it’s obvious to tell that both companies have not been performing well over the past five years. Profitability is declining and there is no sign that the trend will be reversing soon. Given this, the lack of any sharp price increases in the two shares might be a sign that Singapore’s stock market is still relatively rational.


Source: S&P Capital IQ

Foolish Summary

It sure feels great to see the stocks you own gain 90% in a year. But, we always have to ask ourselves if the gains in our shares are actually driven by an increase in the fundamental value of their underlying businesses or if we were just lucky.

If I were to choose, I’d take a situation of my shares staying flat in price but with improving business values over a case of seeing my shares spike by 90% in a year without knowing why it has happened.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any shares in the companies mentioned above.