21 January 2020
Goldman Sachs has released a report on China’s Nifty Fifty, a selection of 50 stocks that would gain from China’s shift to a new economic structure. Photo: China Daily
Goldman Sachs has released a report on China’s Nifty Fifty, a selection of 50 stocks that would gain from China’s shift to a new economic structure. Photo: China Daily

What betting on New China Nifty Fifty tells us

As China’s 19th Communist Party Congress looms, many brokerages are releasing upbeat outlook on the nation’s economic growth prospects.

Among them, Goldman Sachs has coined New China Nifty Fifty by selecting 50 stocks from 18 industries to represent the nation’s robust new economy.

Nifty Fifty refers to the 50 popular large-cap stocks on the New York Stock Exchange in the 1960s and 1970s, when the US economy was shifting from traditional industries to technology, services and consumer sectors.

The term was coined by Morgan Guaranty Trust in 1968, and most of the stocks proved to be solid performers, such as IBM, Walmart, Coca-Cola, Gillette, Disneyland, etc.

The Nifty Fifty index generated an average annualized return of 11.9 percent between 1972 and 2001, according to a study by the Pomona College in the US.

Goldman Sachs released a report last week on China’s Nifty Fifty, predicting that China’s economic growth engine has shifted to new economy sectors, such as internet technology, middle-class consumption, high-end manufacturing, insurance, healthcare, etc.

New China Nifty Fifty includes 25 A shares, 15 H shares and 10 US-listed Chinese companies.

The three top tech firms Baidu, Alibaba and Tencent are given a combined weighting of 26 percent of the index.

Including other tech plays such as AAC Technologies Holdings (02018.HK), Sunny Optical Technology Group Co. (02382.HK), Weibo and Sina, the tech sector adds up to 49 percent of the index.

Meanwhile, consumption stocks such as Midea Group Co. (000333.CN) and Qingdao Haier Co. (600690.CN) have a combined weighting of 21 percent.

The BYD group has two members on the list as both BYD Co. (01211.HK) and BYD Electronic International (00285.HK) have been included in the Nifty Fifty.

These 50 stocks have a forward P/E ratio of 19 times, but Goldman Sachs expects their EPS (earnings per share) to jump 27 percent between 2017 and 2019. And their PEG ratio (price/earnings to growth ratio) is only 0.9, a relatively reasonable valuation.

China’s economy is heading toward a new stage. On one hand, the nation is at the forefront of new technology developments in AI, big data, electric cars, etc. On the other hand, the nation’s emerging middle class will create huge demand for consumption, healthcare and insurance sectors, Goldman Sachs said. The bank suggested investors capture the evolving change in the nation’s economic structure.

All Nifty Fifty stocks are industry leaders that will benefit from increasing industry consolidation. In the meantime, the market has been chasing these hot stocks in recent years, and some of these stocks are marching toward a record high. Investors may not find great bargains if they buy these stocks now, but hopefully, these stocks will scale new heights in the future.

In fact, the US Nifty Fifty had an average P/E ratio of nearly 40 times back then, and they proved their growth potential.

Certainly, Nifty Fifty has outperformed thanks to sustained strong economic growth in the US over the decades. Therefore, the fate of New China Nifty Fifty largely hinges on the nation’s economic growth outlook.

This article appeared in the Hong Kong Economic Journal on Oct. 16

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist