China investors chase "Nifty 50" as love affair with small caps sours

SHANGHAI, April 20 (Reuters) - China's stock investors are

chasing up the country's version of the "Nifty 50" index as

their love affair with trendy small caps fades amid a regulatory

crackdown on speculation and concerns that the economy may lose

momentum later in the year.

The shift in investor preference has also been fueled by a

desire for more stable returns, and a burst in supply of listed

start-ups favoured by smaller punters seeking quick gains.

The term "Nifty 50" originally referred to a group of 50

U.S. stocks favored by institutional investors in the 1960s and

1970s, including stalwarts like General Electric, Coca-Cola, and

IBM, once known as "one-decision" stocks investors could buy and

hold forever.

Now Chinese investors are piling into their approximate

counterparts such as home appliance maker Gree Electric

and spirit maker Kweichow Moutai.

Despite recent market weakness, Gree has gained some 38

percent this year and hit record highs this week, while Kweichow

Moutai became the world's biggest liquor maker by market

capitalisation, dethroning British distiller Diageo Plc.

Big cap stocks have always had a stable and loyal following

among institutional investors in China, but have lacked the

magnetism of small caps in a country where the retail investing

culture is imbued with a high appetite for risk.

"The upward trend for blue-chips like Moutai is not yet

over," Eastmoney Securities strategist Zhang Jiadai said, citing

Moutai's generous dividend payouts and "modest" valuation, at

roughly 24 times forward earnings.

The brokerage's blue-chip Eastmoney Nifty 50 Index has

gained over 5 percent so far this year, outperforming the market

benchmark Shanghai Composite, which is up roughly 2

percent.

Meanwhile, investors are dumping small caps, with the growth

board ChiNext down nearly 6 percent.

Zhang predicted that bearish trend "will last for a long

time," potentially halving the index's valuations from the

current level.

DRAMATIC REVERSAL

Such divergence underscores a dramatic reversal from Chinese

investors' strong preference for small-caps over blue-chips

since 2009, creating huge valuation gaps.

Even after this year's sharp correction, ChiNext still

trades at an earnings multiple of roughly 50, while the SME

board is around 40.

In contrast, the SSE50 Index, another gauge that

some liken to China's "Nifty 50", trades at price/earnings ratio

under 10.

Interest in small caps is quickly waning as regulators have

restricted reckless fundraising, blocked "blind" acquisitions

and vowed to "brandish the sword" against speculation.

"There had been a lot of speculative interest in small-caps,

because high valuations allowed them to raise money cheaply to

fund acquisitions and thus maintain rapid growth," said Zhou

Liang, fund manager at Minority Asset Management Co.

"Once they can no longer keep playing this game, they reveal

their true features," Zhou said, adding he would not be

surprised to see the average valuation of ChiNext shares halve

over the next two to three years.

In addition, regulators are loosening the tap on initial

public offerings (IPOs), flooding the market with newly-listed

start-ups and this depressing valuation of small caps in

general.

Fund manager Zhou predicted that blue chips will continue to

rally due to their relatively low valuations and stable returns,

saying it is "a new cycle that has just started".

Hou Bin, a fund manager at Goldstate Capital Fund Management

Co, said he favored modestly-priced banking and home appliance

stocks, because "when liquidity conditions tend to tighten, and

risk appetite is low, stocks with high valuations will be

dumped".

But Wu Kan, head of equity trading at Shanshan Finance, said

there may be a silver lining in that painful process for

discerning investors.

"As the bubble deflates, there will definitely be bargain

opportunities for those real growth stocks with core

competitiveness."

(Reporting by Samuel Shen and John Ruwitch; Editing by Kim

Coghill)