June 19, 2017 7:14 pm JST

Going up! The Shanghai 'Nifty Fifty' takes flight

Investors have started flocking to undervalued Chinese large-cap blue chips

KEIICHIRO MORIYASU, NQN staff writer

HONG KONG -- Causal observers of the more-or-less moribund Shanghai Stock Exchange (SSE) Composite Index might be advised to sit up and take notice, as there are some interesting signals flashing in the market as of late.

A case in point is the formerly unremarkable Ping An Insurance Group stock, which began to shake off its stupor around May 10. This usually low-profile company has rarely made headlines, despite being financially sound. However, its stock price jumped 30% the next month to hit its highest level in nine years and five months on June 12. The craze, led by institutional investors at home and abroad, has since fizzled somewhat, but the stock is still more than 20% higher compared to when the rally began.

Ping An Insurance is one of the 50 issues comprising the Shanghai Stock Exchange 50 Index, a benchmark index made up of 50 large-cap, liquid blue chips listed on the SSE. The company is the dominant issue in the market-cap-weighted index, accounting for 11.49% as of May.

Between May 9 and June 12, the index rose 9% while the SSE Composite Index, which includes all SSE issues, rose only 2%. The surge was also helped by other heavyweights in the index, such as China Merchants Bank, up 22%, and brewer Kweichow Moutai, up 16%.

Why are investors buying China's large-cap blue chips now?

Since the beginning of the year, stock markets have been going nowhere but up in South Korea, Taiwan and Southeast Asia thanks in part to temporary improvement in the Chinese economy. But China was left out of the global equity rally as it tried to pop a domestic asset bubble by tightening financial controls.

In May, Hong Kong shares hit two-year highs and "the lagging of mainland Chinese stocks became all the more apparent," said Liu Lin, chief representative at the Aizawa Securities Shanghai Representative Office. Overseas investors then flocked to those undervalued Chinese stocks, snatching them up through exchange-traded funds and via the Hong Kong stock exchange, which is now connected to the SSE.

The index also rose on expectations that U.S. stock index provider MSCI will decide to add mainland Chinese shares to its emerging market stock index this week. Since the company is considering adding only large-cap issues, the selection will most likely include SSE 50 companies.

The flood of money into Chinese blue-chip stocks provokes memories of the so-called Nifty Fifty in the U.S. in the early 1970s, when issues like Coca-Cola and IBM danced wildly. But some argue that the Chinese index probably shares little more with its American counterpart than the number of issues included.

The Chinese Nifty Fifty are still undervalued in terms of various valuation measures, they say. Ping An Insurance, for example, is trading at around 12 times its future earnings. The recent excitement is different from the one that eventually led to the bubble bursting in the U.S., they argue.

Still, Bocom International Holdings strategist Hong Hao pointed out that "big caps tend to outperform amid moderating growth, as it is now." If the spike in the SSE 50 Index is only a result of investors taking flight rather than seeing growth potential in the stocks, this may not be much cause for celebration.

Asia300

Ping An Insurance (Group) Co. of China Ltd.

China

Market(Ticker): HKG(2318)
Sector:
Industry:
Finance
Multi-Line Insurance
Market cap(USD): 129,476.04M
Shares: 18,280.24M
Asia300

Kweichow Moutai Co., Ltd.

China

Market(Ticker): SHG(600519)
Sector:
Industry:
Consumer Non-Durables
Beverages: Alcoholic
Market cap(USD): 89,038.46M
Shares: 1,256.19M

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