Secondary trading boards for start-up stocks in Asia have sunk to multi-year lows, missing out on a regional rally this year, as skittish investors opt instead for more stable blue chips.

Growing concern over investing in high-growth start-ups came to a head during a one-day trading rout on June 27 in Hong Kong’s Growth Enterprise Market (GEM). The S&P/HKEX GEM Index, which tracks three-quarters of the GEM board, plunged 9.6% on the day. Through June 29, the index was down 20.4% so far this year and more than 80% off a ten-year high.

“The meltdown gives a lesson to everybody that there are a lot of market makers lurking out there telling retail investors to go into those small caps and make a killing there,” said Louis Tse, a managing director at VC Asset Management.

“It doesn’t mean that there are no quality stocks in the GEM, but investors have to do their homework.”

Across the border, the secondary growth board in China, ChiNext, has also been in a rut. The ChiNext Price Index is down 7.6% on the year through June 29, while the Shanghai Composite Index is up 2.7.

Meanwhile, Singapore’s Catalist market has fared better and managed to claw back some of the losses suffered in recent years. The FTSE ST Catalist Index is up nearly 10% in 2017, but still remains down more than 30% from the start of 2015.

It has been another story altogether for Asia’s blue chips, which have set the pace on a resurgence in regional equity markets. The MSCI AC Asia Pacific Ex Japan Large Cap Growth Index has surged 21.3% this year through May. Hong Kong’s benchmark Hang Seng Index is up 18% in 2017 through June 29.

The sudden swoon in secondary trading boards raises questions about the level of depth in Asia’s capital markets and may give investors pause when considering high-growth enterprises without long financial histories.

Secondary trading boards were established to become Nasdaq-style trading hubs and provide exit opportunities for venture capital investments in companies that did not yet meet main board listing requirements. Exchange operators hoped this would boost the initial public offering market and also stimulate high-growth sectors like information technology and infrastructure development by connecting fledgling companies with a larger network of investors.

Startup stocks chart (Westra)

ChiNext did serve as a viable IPO market last year, accounting for about a third of the 227 new listings in Shanghai and Shenzhen and US$3.7 billion of a total US$21.7 billion in fundraising, according to PwC. The Catalist and GEM boards did not fare as well, however, as each accounted for less than 5% of total IPO fundraising amounts in their respective markets.

Trading in secondary board-listed stocks themselves has also come under pressure.

Valuations continue to remain high despite the sizable sell-off in recent years. ChiNext traded at an average 50.1 times earnings versus a 25.7 times valuation for the Shenzhen Stock Exchange’s main board through June 29. The GEM board was at 46.7 times through May, more than three times Hong Kong’s average main board valuation.

A lack of liquidity has been another concern raised by investors. Large trade orders risk causing significant price swings in GEM-listed counters, for example, as only eight out of more than 250 listed stocks traded at higher than HK$5 (64 US cents) on June 28.

As a result, liquidity has started to dwindle. The GEM’s turnover velocity, which is a commonly used trading indicator that measures turnover versus market capitalization, plummeted to 37.5 in 2016 from 98.6 the previous year. Meanwhile, in Singapore, less than three dollars worth of shares traded on the Catalist in 2016 for every 100 dollars that were in play on the main board.

“It doesn’t mean that there are no quality stocks in the GEM, but investors have to do their homework”

Investors may also be wary of major price reversals like the recent rout in GEM-listed stocks. The FTSE ST Catalist Index has been susceptible to sudden swings, for example, as evidenced by a five-year average Sharpe ratio of -0.6 through May. The Sharpe ratio measures an investment’s average return in relation to volatility, and investors looking to avoid excess risk generally prefer a reading of at least 1.0.

Even those investors willing to bear the added risk of owning secondary board-listed stocks may still have concerns as to whether the company will even act in the interests of its shareholders. Hong Kong-based corporate activist David Webb has since been credited with forecasting the potential for the recent GEM trading rout, for example, because he earlier detected a web of 50 small-cap stocks that had profited through accumulating investment interests in one another.

“They will probably do so until the bubble bursts, because the gains on such stocks are not actually intended to benefit their shareholders,” said a report dated May 15 on Webb’s website. “The people who engineer such bubbles have other plans.”

Amid the increased scrutiny on secondary boards in the region, Japan’s Mothers Index has been a bright spot. The benchmark tracks high growth companies on the Tokyo Stock Exchange and is up 25.7% so far this year through June 29, seemingly benefitting from increased oversight put in place by the exchange operator following a delisting scandal of an internet service provider a decade ago.