Amid bull run, equity investors must stay rational

The bulls are in full flow on the Chinese bourses, the bears are in hibernation and there are smiles all-around. Sentiment is on a high, but it is important for investors to have a calm, rational approach to gain long-term profits.

The benchmark Shanghai Composite Index has risen by 15.61 percent since the beginning of the month and closed on Thursday at 3450.59 points. But what was really eye-catching was the nearly 6-percent surge of the market barometer on Monday, the biggest single-day rise in five years, surprising even the optimists.

The daily trading value of the A-share market has surpassed 1.5 trillion yuan ($214.65 billion) for four trading days in a row as of Thursday, indicating that more funds have started flowing into the market and further upswings are on the way.

This could exactly be the right medicine that policymakers are seeking to infuse into the nation's capital markets for its vitalization. But market participants need to have a rational mindset and conform to the market logic, if they want to be a part of the rally.

Historical lessons, especially the market frenzy in 2015 followed by a painful meltdown, tell us that only a rational approach is beneficial to market participants.

This is because high volatility and uncertainty are the key characteristics of any equity investment. Volatility is expected to increase this year with liquidity and valuations being the mainstays of growth. This is especially so as the shares that have seen substantial increases in valuations, often far exceeding their corporate earnings potential, could face material downside risks.

Investors should adopt prudent risk management measures and avoid big bets on stocks with unreasonably high valuations to avoid huge losses. It is also necessary for investors to be aware of the new "market normal" where fundamentals carry more weight than before.

With market-oriented capital market reforms set to deepen, we will see more long-term investors entering the market. As a result, value investing will gradually become the mainstream trend. It has already started to crimp speculation in newly-listed shares, loss-making zombie companies and small-cap firms.

Public floats have been increasing steadily on bourses, especially after the pilot registration-based IPO system was adopted by China. This will help rectify the lack of investment targets in the market and make the broad-based, indiscriminate stock price rises less common. Stocks with weak or plain-vanilla fundamentals may no longer witness the mad chases seen in previous bull runs.

Being fully aware of the market fundamentals and avoiding frenzy will help investors to better tap into the market and grow their wealth. It will also help create a stable equity financing environment for listed firms, which will further boost the country's economic restructuring.

"We must accelerate the development of the capital market so as to transform the production factor and debt-driven economy into one driven by innovation and efficiency," said Xiao Gang, a national political adviser and former chairman of the China Securities Regulatory Commission, the country's top securities regulator.

The country's leadership has never attached so much emphasis to the capital market like now, Xiao said at a forum on Tuesday, adding that the capital market is more efficient than the banking system in allocating resources among the tech sector.

The unprecedented policy environment, ample liquidity across the world, a brisk recovery of the Chinese economy, and a low valuation level by global standards, have created a historic opportunity for A-share market to further extend its profitability. Happy days may be ahead for investors in the form of robust returns, especially for those who have a cool head and are not swayed by the wild market swings, which still can't be ruled out, given the potential for liquidity-propelled volatility.