BEIJING, CHINA – FEBRUARY 09: Residents walk on Wangfujing Pedestrian Street in the snow on February 9, 2023 in Beijing, China.
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Goldman Sachs strategists see the economy’s shift from “reopening to recovery” driving Chinese stocks to 24% higher by the end of this year.
The company sees a potential upside of 24% to the MSCI China index as the country passes a reopening that follows a strict zero-Covid policy into a growth phase, according to Monday’s note.
“We believe the main theme in the stock market will be a gradual shift from reopening to recovery, with the driver of potential benefits that can be converted from multiple expansions to growth/income delivery,” Goldman Sachs strategist including head of China equity strategy Kinger Lau said. in the notes.
Chinese stocks entered bull market territory around the Lunar New Year earlier this year – with the MSCI China index rising by the end of January to nearly 60% from its October low.
By Friday’s close, the index had lost about 8% since its Jan. 27 peak. That puts it close to market correction territory, usually defined when the index falls more than 10% from its most recent peak.
MSCI China tracks more than 700 globally listed Chinese stocks, including Tencent, BYD and Industrial and Commercial Bank of China. Goldman Sachs in July cut its earnings outlook for the index to zero growth.
The move would be “like recalling the transition from the Hope to Growth phase in a typical equity cycle,” he wrote, adding that Covid is now “arguably in the rearview mirror” in China.
The latest buying producer index as well as consumption levels show “clear signs of normalization of activity, albeit from a low base,” strategists wrote.
Goldman Sachs expects China’s economy to grow 5.5% in 2023 as a whole, supported by second and third quarter growth that is currently 9% and 7%.
“Growth momentum should be tilted heavily towards the consumer economy, where the service sector is still operating significantly below pre-pandemic 2019 levels,” he wrote, pointing to Chinese households having more than 3 trillion yuan ($437 billion) in savings this year. . .
Strategists added that professional speculators are showing greater appetite for Chinese stocks, citing data from the company’s main brokerage.
“Hedge fund investors have re-risked a lot in China stocks, especially in Offshore equities per GS Prime Brokerage, with net exposure in China relative to total global equity exposure almost back to record highs,” he wrote.