A friend asked, I've noticed that the new energy index has dropped quite a bit recently. Is it currently undervalued? Can I start making regular investments?

What is new energy?

There are different classifications of indexes.

- The ones we commonly see, such as the CSI 300, the CSI 500, etc., belong to broad-based indexes.

- Indexes like dividend, value, etc., belong to strategy indexes.

- The new energy index, on the other hand, belongs to thematic indexes.

The scope of new energy is quite broad.From upstream minerals (materials) to downstream new energy vehicles (optional consumption), there are related varieties.

Currently, the index corresponding to new energy is mainly the CSI New Energy Index, with the code 399808.

This index starts from 1000 points, with the base date being December 31, 2011.

Investment scope of the CSI New Energy Index

The CSI New Energy Index includes 80 constituent stocks in related fields, mainly involving:

(1) Renewable energy (nuclear, wind, solar, shale gas, biomass, geothermal, tidal)

(2) New energy applications(3) New Energy Storage

(4) New Energy Interchange Equipment and related industries

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In terms of industry distribution, as of September 21, 2023, the new energy index covers the following industries and their respective proportions:

- 38.16% in Industry

- 26.39% in Information Technology

- 26.00% in Materials

- 9.46% in UtilitiesIt can also be observed that the China Securities New Energy Index contains a relatively small number of stocks related to new energy vehicles.

Industries such as automobiles and home appliances, which are classified as discretionary consumer industries, have a low proportion in the new energy index.

Historical Fluctuations of the China Securities New Energy Index

Since its inception, the new energy index has gone through two bull and bear market cycles.

- First bull and bear market cycle: 2012 to the end of 2018

- Second bull and bear market cycle: 2019 to present (September 2023)Next, let's delve into the details of these two bull and bear market cycles~

The first bull and bear market cycle: From 2012 to the end of 2018

At the beginning of 2012, when the new energy index was just established, the overall A-share market was in a bear market phase.

Up until mid-2014, the market remained rather sluggish.

During these years, the new energy sector was also quite depressed, and it did not experience significant growth overall.

By the second half of 2014, due to a series of consecutive and intensive interest rate cuts, the market began a strong rebound.

By mid-2015, the overall A-share market had reached a one-star bubble phase.The new energy index has also been on an upward trend, rising from its lowest point of 700 to its highest of 3,121.

During this bull market, the new energy index has more than quadrupled in value.

Valuations have also reached an all-time high.

However, extremes meet with reaction.

In the second half of 2015, the bubble in the A-share market burst, and the overall market headed downward.

New energy also began to decline continuously, falling from 3,121 to 1,071 by the end of 2018, a drop of 66%, almost returning to the levels of 2012 and 2013.At the end of 2018, the A-share market was at a 5-star level.

Many growth-style varieties, including new energy and pharmaceuticals, reached their historical lowest valuations at that time.

The second round of bull and bear markets: From 2019 to the present (September 2023)

From 2019 to 2021, the new energy sector welcomed a new round of bull market.

This was due to two factors.On the one hand, these past few years have been a bull market for growth styles, with value and dividend indices significantly underperforming the market.

As a typical representative of the growth style, new energy has naturally caught the fast-rising wave.

On the other hand, over these two years, the penetration rate of new energy within the entire energy industry has also increased noticeably.

In fact, the "new" in new energy is only relative to traditional energy sources (such as coal, oil, etc.). Both photovoltaics and wind power have been around for more than a decade. It's just that the high costs in the early stages led to a low penetration rate.

However, between 2020 and 2021, this situation changed.Due to the impact of the overseas energy crisis, the prices of traditional energy sources such as oil and coal have risen sharply.

In the field of new energy, with the improvement of related technologies, the unit cost has gradually decreased.

This has led to an increasing penetration rate of new energy in the energy industry.

The profitability and revenue growth of the entire new energy industry are at a very high level.

These two factors have jointly driven the new energy index to rise from 1,071 points at the end of 2018 to a peak of 5,128 points in 2021.

In this bull market, the increase in the new energy index has exceeded four times, with an increase that is no less than the bull market of 2014-2015.

The valuation has also exceeded the level of the 2015 bull market, reaching the highest historical valuation.However, everything is cyclical.

The alternation of bull and bear markets is the norm, as is the shift in market styles.

This is true for the entire market as well as for thematic indices such as new energy.

After 2021, the value style began to gain strength, while the growth style, such as new energy, had to be relatively less impressive.

Moreover, with the rapid development of the past few years, the scale of new energy listed companies has gradually increased, and the profit growth rate has obviously slowed down.This led to the gradual decline in the valuation of new energy after 2021.

The new energy index also fell from a high of 5,128 points to 2,318.77 points on September 21, 2023, which can be said to have been halved.

Valuation of the CSI New Energy Index

In the new energy index, industries such as industry and materials have a high proportion.

In this case, it is also OK to refer to the price-to-book ratio.

The following chart shows the historical price-to-book ratio trend of the new energy index. It is generally considered undervalued when it falls below a price-to-book ratio of 2.5 times.By September 2023, after the decline in new energy, the current price-to-book ratio is around 2.3 to 2.4 times. It has also returned to the undervalued area.

It should be noted that new energy is a category with significant volatility, with both ups and downs being quite drastic.

When investing, we should appropriately control the proportion, and it is generally more prudent to keep the proportion of a single industry or thematic category between 15% and 20%.