As U.S. equities hit record highs to close out 2020, market observers pointed to the rally in shares of unprofitable new economy stocks as a potential sign of investor overexuberance. A simple portfolio made up of money-losing U.S. companies in the tech sector shot up nearly 130% from the depths of March 2020 through February 2021.
Those tracking China’s mainland stock market will naturally wonder whether one of 2020’s best performing major markets—up over 27% last year—has seen similar signs of froth. That was certainly the case in the runup to an infamous bubble in China A shares back in 2015, when a price plot of junk tech stocks went nearly vertical.
Investors will be surprised to find that the situation in 2020 was a much different one for Chinese stocks, whose recent rally has been fueled more by genuine fundamental improvement amidst a strong economic rebound from the pandemic than irrational overvaluation of unprofitable new economy shares, which rose only modestly on the year, increasing by just 14% and underperforming the broader market.
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Hypothetical, back-tested performance results have many inherent limitations. Unlike the results shown in an actual performance record, hypothetical results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over- compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical results in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any investment manager.
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