The core challenge of a long-term bull market is profitability

The core challenge of a long-term bull market is profitability, but this can be viewed using an indicator: stock premium = the difference between the stock return (E/P) and the 10-year Treasury bond return. The higher this indicator is, the cheaper the stock is (lower PE).

If you look at the stock premiums of China and the United States, you can see that before 2022, the trends are very similar, but China's premium is lower - this means that Chinese stocks are more expensive, but after 2022, Chinese stocks are cheaper than US stocks.

The reason is of course easy to understand, capital outflow and the withdrawal of investment from China's capital market initiated by Wall Street in the United States. But this also means that Chinese stock prices are at a low level.

Another indicator is the change in overall market value. In 2009, the market value of China's stock market was 29% of that of the United States. In December 2021, it peaked at 27%. It can be seen that the market value growth of the Chinese and American stock markets was almost the same during these 12 years. In September 2024, the ratio was 15%, which shows the differentiation during this period.

The question is, why do the Chinese and American stock markets feel different from 2009 to 2021? There is only one answer, the Chinese stock market has expanded too fast: in 2010, there were 2,000 listed companies in China, and today there are 5,335, an increase of 160%. This is just like this round of VC coins, the market value has increased but the coin price has not.

Here are two quick conclusions:

1 - China's stock market is temporarily undervalued, whether from the perspective of PE/10-year treasury bonds or from the perspective of the market capitalization ratio between China and the United States.

2 - In the long run, Chinese companies are not unprofitable, and their market value is not rising, but the increase in market value is mainly taken by newly listed companies and stocks, so the result is that the increase in individual stocks is limited. From this, it can be inferred that the future increase in the stock market may still be constrained by capacity expansion.

Combining the above, now is the time to be optimistic about the Chinese stock market as a whole, as this is a bottoming out rebound.