November 22, 2019 / 5:48 AM / 3 months ago

GRAPHIC-China's traditional 'Nifty 50' darlings signal economic stress

SHANGHAI, Nov 22 (Reuters) - More than a third of China’s “Nifty 50” stocks have, for the first time in three years, slipped to levels that suggest further economic slowdown and deterioration in their profitability.

Shares of these firms now trade below their book values, which are the net value of assets they own. That could imply investors do not expect market conditions for these firms to improve any time soon as a protracted Sino-U.S. trade war saps demand in the world’s second-largest economy.

Shanghai-listed shares in China Shenhua, the country’s largest coal miner, saw its price-to-book-value ratio, or PB ratio, fall to 0.98 on Thursday, joining other blue-chip heavyweights whose prices are below their book values.

Shenhua’s PB ratio was last below 1 in 2016 in the aftermath of a massive crash in the Chinese stock markets.

A total of 18 constituents of the Shanghai SE 50 index - dubbed China’s “Nifty 50” index - comprising many of the country’s largest listed companies, have slid below their book values.

“The low valuations reflect rather downbeat expectations about China’s economy, which remains under further pressure and whose growth rate could fall below the 6% mark next year,” said Yan Kaiwen, an analyst with China Fortune Securities.

Banking stocks have among the least valuable PB ratios in the 50-strong group as a falling economy puts pressure on lenders’ profitability and raises concerns about the quality of their assets.

Investors have chased those “Nifty 50” stocks for most of this year, with the index logging a near 30% increase so far, versus a 17% gain for the benchmark Shanghai index.

They have also been darlings of foreign investors, who seek investment opportunities and favour industry leaders, as Beijing further opens up its financial markets and international index providers including MSCI lift weightings of A-shares.

However, most of these 18 stocks underperformed the broader market, with some even seeing steep losses so far this year.

Among them, state energy giant PetroChina is down 23% this year, while the country’s biggest steel maker Baoshan Steel dropped about 18%.

Even within the broader A-share market, stocks of companies in energy, construction and materials industries, have underperformed as investors moved out of China’s traditional industries in anticipation of a shift towards a more tech-driven economy.

The CSI construction engineering index hit a record low this week, while the SSE energy sector index touched a more than 13-year low.

China’s future lies in the tech sector, which has become a standard choice for investors’ allocations and could divert investor interest away from traditional players, China Fortune Securities’ Yan said.

Editing by Vidya Ranganathan and Sherry Jacob-Phillips

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