- “We believe the main stock market theme will gradually shift from reopening to recovery,” Goldman Sachs said in a Monday note.
- As of Friday’s close, the MSCI China index was down about 8% from its Jan. 27 high. This brings it closer to market correction territory, generally defined as when an index falls more than 10% from its recent high.
BEIJING, CHINA – FEBRUARY 09: Citizens walk on Wangfujing Pedestrian Street in snow on February 9, 2023 in Beijing, China.
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Goldman Sachs strategists see an economic shift from “reopening to recovery” driving Chinese stocks up 24% by the end of this year.
The company sees 24% upside potential for the MSCI China index as the country transitions from reopening following its strict zero-Covid policies to a growth phase, according to a Monday note.
“We believe the main theme for the stock market will gradually shift from reopening to recovery, with the driver of potential gains likely shifting from multiple expansion to earnings growth/delivery,” said Goldman Sachs strategists, whose Chief China Equity Strategist Kinger Lau. note.
Chinese stocks entered bullish territory around Lunar New Year earlier this year – with the MSCI China index peaking in late January up nearly 60% from lows seen in October.
As of Friday’s close, the index was down about 8% from its Jan. 27 high. This brings it closer to market correction territory, generally defined as when an index falls more than 10% from its recent high.
MSCI China tracks more than 700 Chinese stocks listed globally, including Tencent, BYD and Industrial and Commercial Bank of China. Goldman Sachs cut its earnings outlook for the index to zero growth in July.
The moves “will be reminiscent of a transition from the hope phase to growth in a typical stock market cycle,” they wrote, adding that Covid is now “arguably in the rearview mirror” in China.
Its latest manufacturer purchase index along with consumption levels show “clear signs of activity normalizing, albeit from a low base,” the strategists wrote.
Goldman Sachs expects China’s economy to grow 5.5% for the whole of 2023, fueled by second and third quarter growth which it now estimates at 9% and 7%, respectively .
“The growth impetus is expected to be heavily skewed towards the consumer economy, where the service sector is still operating well below pre-pandemic 2019 levels,” they wrote, pointing out that Chinese households have a surplus of savings of more than 3 trillion yuan ($437 billion) this year. .
The strategists added that professional speculators were showing a greater appetite for Chinese stocks, citing data from the firm’s top brokerage.
“Hedge fund investors have significantly re-risked in Chinese equities, primarily in offshore equities by GS Prime Brokerage, with their net China exposures relative to their total global equity exposures returning to near all-time highs,” they wrote.