Source: Finance Association

The Chinese market has always played an important role in the global economy, and its huge scale, continuous growth vitality, and increasingly open trend have attracted the attention of investors from all over the world. Foreign investors' attitudes and opinions on the Chinese market have always been the focus of investors' attention.

At the Goldman Sachs China Stock Market Analysis and Future Outlook media conference held on May 24, Goldman Sachs China stock strategist Liu Jinjin expressed his views on current topics such as macroeconomics, Chinese stock valuation, global market asset allocation, and industry changes.

Overseas investors are no longer pessimistic about China's macroeconomy

According to the MCI China Index, the Chinese market has rebounded about 30% since the low at the end of January. The rebound performance of the Chinese market is superior to that of major global markets. Over the past few months, Chinese stocks have outperformed the global stock market by a large margin. In response to this, investors generally ask two questions: Why is it rising? Who's buying it?

Liu Jinjin said that from a macroeconomic perspective, foreign investors' expectations for China's macroeconomic economy this year have changed markedly, especially after the release of GDP data for the first quarter. At the beginning of the year, the market generally expected GDP growth of 4.5% this year, but now this forecast has been raised to 4.9%. This change is mainly due to developments after the release of GDP data for the first quarter. Currently, overseas investors are no longer as pessimistic about China's macroeconomy as they were at the beginning of the year. Goldman Sachs Research predicts China's GDP growth of 5% this year, which is in line with the government's target.

The introduction of the policy is also one of the important reasons for the recent excellent performance of the market. These policies have largely eliminated some of the tail risks investors had previously feared. According to market data, Liu Jinjin estimated the total amount of A-shares purchased by the “national team”, which is about 200 billion yuan. These funds mainly enter the market through ETFs, which is equivalent to the government providing bottom support for the market.

Regarding interest spreads between local financing platforms and treasury bonds, Liu Jinjin also explained, “Last year, interest spreads between local financing platforms and treasury bonds were at an all-time high, but now they have fallen back to an all-time low. This shows that the market believes that the risk of local financing platform debt has improved significantly.”

Apart from macroeconomic and policy factors, what investors are most concerned about is the real estate market. According to the real estate risk barometer compiled by Goldman Sachs Research, Liu Jinjin said, “Overall, the market's perception of real estate risk reached a peak at the end of 2022, but with the introduction of the government's real estate policy in the past few months, these implied market risks have declined significantly.”

Furthermore, capital market policy changes have attracted widespread attention. The “National Nine Rules” policy introduced in April is an important concern for many overseas investors. Liu Jinjin believes that if the policy goals in the “Nine Rules of the State” are achieved, there will be room for an increase of about 20% for A-share valuations. This is based solely on changes in valuation, and does not take into account the impact of real estate and other policies on the economy. In the most optimistic situation, if indicators such as the dividend rate and repurchase of A-shares reach the leading market level in Europe and the US, there may be room for revaluation of about 40% of A-shares.

Chinese stock valuations are still very attractive

When it comes to the stock market, Liu Jinjin believes that the most important thing is to look at profit growth. He explained that the current profit growth rate of Chinese stocks has exceeded expectations by 54%. Although the overall market's profit forecast for listed companies has recently been lowered, if we focus on the Internet and consumer sectors, we can see that profit growth in these fields has stabilized, and even rebounded at a low level.

Liu Jinjin also mentioned investors' sentiment and market performance. At the beginning of the year, investors' risk appetite and sentiment were very low, which is one of the main reasons why the market rebounded 30%. “At the annual macro conference held in Hong Kong at the end of January, more than 2,000 global clients were invited to discuss macro topics. The conference questionnaire showed that the market's willingness and sentiment to invest in Chinese stocks was very low at the time.” he said.

Looking specifically at investors' allocations to Chinese stocks, the data shows that global public funds have allocated only 5.2% of their positions to Chinese stocks, which is the lowest point in the past 10 years. Chinese stock positions in hedge funds have recently risen, but they are still only around 7.5%. This shows that despite increased liquidity, the absolute holdings of global funds in Chinese stocks are still at historically low levels.

Liu Jinjin believes that there is still room for further improvement in stock liquidity in the future. Judging from the data, about 70% of investors outperformed the benchmark index in the first quarter of this year due to their low allocation in the Chinese market. However, by April, the performance of Chinese stocks had advanced by leaps and bounds, causing 670 percent of investors to lose the benchmark index.

“One important reason for the rise in the market is valuation.” Liu Jinjin emphasized. Even after the rebound, the valuation of Chinese stocks remains highly attractive compared to other global markets. As a result, some capital has recently returned to the Chinese market from the US, Japan, and India, showing that the valuation of the Chinese market is still very attractive.

Future profit growth is an important driver of additional market returns

Looking back at historical trends, we can see that in the past 20 years or more, after the market rebounds 20%, there is still a 60% possibility that it will continue to rise. Liu Jinjin pointed out that historical experience shows that the driving force of a bull market usually shifts from valuation repair to profit growth, so future profit growth will be an important driving force for additional market returns.

Regarding the current valuation level, the current price-earnings ratio is about 10 times, which is a relatively reasonable and balanced level from a macro perspective. Liu Jinjin believes that future returns will mainly depend on profit growth. According to Goldman Sachs's estimates, the total amount of the central government's support for real estate this year is about 1 trillion yuan, of which about 300 to 500 billion yuan has already been implemented. The remaining 500 billion dollars are expected to be gradually implemented over the next six to seven months.

Under basic assumptions, the reasonable valuation of Chinese stocks is about 11 times; currently, it is about 10 to 10.5 times, so there is still room for improvement in valuation. If the government does provide $1 trillion in support, the market's earnings per share (EPS) growth is expected to reach 8%. Combining these two points, Liu Jinjin expects the MSCI China Index to target 70, which is a return of about 10% compared to the current point.

Also, investors are very concerned about Sino-US relations. “The November US election is imminent, and Goldman Sachs has released an index of Sino-US relations. Since the end of last year, the index has declined, indicating that market concerns about Sino-US relations have abated. Recently, however, the index has rebounded due to tariff issues and geopolitical risks. Overall, the index is at the historical median level, not particularly pessimistic, nor particularly optimistic. In the next few months, the US may introduce more policies, which will be one of the main sources of risk in the Chinese stock market.”

High-end internet and consumer services, optimistic about high-dividend industries

Liu Jinjin also analyzed the market and thematic investments. First, for the MSCI China Index, Goldman Sachs raised the target point from 60 to 70 points, and on the A-share side, it also raised the 12-month target for the Shanghai and Shenzhen 300 Index from 3,900 points to 4,100 points, which means there is still 11-12% return space compared to the current point. “We are still optimistic about A-shares.” Liu Jinjin said.

Liu Jinjin also proposed an A-H stock market rotation model to judge the performance of A-shares and Hong Kong stocks in the next three months. “Two months ago, the model predicted that Hong Kong stocks would outperform A-shares in the next three months. However, the latest update shows that returns in both markets will tend to balance. In the past month or two, Hong Kong stocks have significantly outperformed A-shares, but the risks in the two markets are now more balanced, and A-shares still have strong upward momentum from their current position.”

After the policy was introduced, risks in the banking and real estate sectors were reduced, so these two sectors were also adjusted from low allocation to neutral.

In terms of the low-end sector, the current adjustment of the automobile industry's rating from neutral to low-end is mainly due to concerns about overcapacity and domestic deflationary pressure. At the same time, Goldman Sachs also adjusted the capital goods industry from neutral to low grade because the price competition in this industry is fierce.

In terms of thematic investment, Liu Jinjin said that the theme he has always been optimistic about is the increase in shareholder returns, including dividend returns and the strength of stock repurchases. Data shows that in the past year or two, stocks with high dividends and strong repurchases have performed better than the market, and are also highly correlated with US 10-year treasury bonds. In the context of high interest rates, investors are more concerned about real returns, such as profit dividends and stock repurchases. “These types of companies have performed well, and we expect this trend to continue.”

In the Chinese market, Liu Jinjin believes that there is still a lot of room for improvement in the dividend rate. Currently, the dividend rate for A-shares and Hong Kong stocks is about 30%, which is far below the global average or the emerging market average. If the dividend rate is increased from 30% to 40-50%, the overall return may increase significantly.

editor/tolk