“Chen Li, the UBS AG (UBSN) strategist who predicted the tumble in China’s smallest sharestwo years ago, says the companies are poised to retreat again after valuations rose to the biggest premium over larger stocks since 2010.
The ChiNext index of Shenzhen-listed companies with a median market value of $765 million climbed 43 percent this year through last week, while the CSI 300 Index, which has a median capitalization of $3.5 billion, rose 2.7 percent. The smaller-company gauge traded for 4.6 times net assets versus 1.7 for the CSI index, the widest gap since June 2010, data compiled by Bloomberg show.
Small-cap stocks have surged on speculation President Xi Jinping’s plan to boost the consumer, technology and alternative energy industries will benefit companies from Huayi Brothers Media Corp. (300027) to Leshi Internet Information & Technology Co. (300104) The rally may get derailed by tighter monetary policy, which helped spur the last slump, according to Chen.
“The bubble may burst” within two months, Chen said in a May 9 phone interview. The Shanghai-based strategist predicted in January 2011 that small-cap stocks would drop as much as 20 percent. The ChiNext gauge fell 21 percent in nine months.
Investors will rotate out of smaller companies and into larger stocks as liquidity tightens, Chen said.
