Source: Wall Street See

The People's Bank of China's series of 'nuclear-grade' monetary policies completely ignited the Chinese stock market.

In September, the A-share market $SSE Composite Index (000001.SH)$ and the Hong Kong stock market $Hang Seng Index (800000.HK)$ both surged by more than 17% for the entire month. During the 'Eleventh' National Day holiday, the A-share market was closed, while global capital continued to 'panic buy'. Last week, the Hang Seng Index surged by 10.2% to reach a two-and-a-half-year high, as did the US stocks.$NASDAQ Golden Dragon China (.HXC.US)$Then it surged nearly 12%.

It is a common concern among investors to wonder how long this bull market can last, where the finish line is, and which assets are worth paying attention to.

Hang Seng Index aims for 33,000 points, while the CSI 300 may return to 5,500 points?

Wall Street generally believes that after the 'big gift package' of monetary policy from the People's Bank of China is implemented, a large-scale stimulative fiscal policy is 'waiting to be released.' Combined with the emotional aspect of retail investors rushing into the market, there is still significant room for growth in the Chinese stock market.

On October 5, Goldman Sachs raised its rating on the Chinese stock market to 'overweight' in its latest report, forecasting a further increase of 15-20%. Goldman Sachs raised the target price for MSCI China from 66 to 84, and for $CSI 300 Index (399300.SZ)$ 's target price was raised from 4000 to 4600.

In its latest research report, Morgan Stanley estimates that if retail investors continue to maintain optimistic sentiment, as much as 2-3 trillion RMB will be reallocated from Chinese household financial assets to the stock market. The institution believes that the rebound of the Chinese stock market will be divided into three stages:

Phase One: 15% initial increase, already completed by the market;

Phase Two, expected to have 12% growth potential, driven by global investors' optimism towards the Chinese market and asset diversification;

Phase Three, the need to see corporate profit growth, improvement in debt conditions, and effective implementation of government fiscal stimulus policies.

Deutsche Bank, on the other hand, warned, "If you abandon this rebound, you will bear the consequences." The bank pointed out in the report released last week that despite possible overbuying in the short term, investors should continue to add Chinese stocks. The bank estimates that by as early as 2025, the Hang Seng Index and the CSI 300 Index will respectively return to historical peaks of 33,000 points and 5,500 points, representing a further 42.9% and 36.9% upside from current levels.

In the past two years, we have repeatedly mentioned that we are particularly bullish on the Hang Seng Index, expecting it to surpass its previous peak of 33,000 points during the uptrend, while the CSI 300 Index will revisit 5,500 points. Our main question is how long this will take, as shown in the table below, possibly as early as 2025.

Opportunities still exist in the financial sector, with brokerage stocks expected to continue leading the bull market.

JPMorgan believes that Chinese financial stocks, despite experiencing several rounds of significant gains, still appear cheap. An analyst team led by Katherine Lei released a report last week pointing out that Chinese financial stocks, overall, have a 39% discount in price-to-book ratio (PB) compared to the peak values of 2020/2021, and a 65% discount compared to the peak values of 2015.

In the financial sector, Goldman Sachs' preference order is brokerage (A/H shares) > life insurance (H shares) > growth-type banks (A/H shares) > life insurance (A shares) and property insurance (A/H shares) > state-owned enterprise banks (A/H shares).

In other words, Goldman Sachs believes that the brokerage sector has the greatest upside potential, while state-owned enterprise banks have the smallest upside potential. The institution wrote:

Brokers have the highest beta coefficient in the Chinese banking industry, and their earnings should benefit from the increase in finance and securities lending as well as average daily trading volume (ADT). Our sensitivity analysis shows that in an optimistic scenario, the potential increase in earnings per share (EPS) for brokers could be 37%, and the return on equity (ROE) could reach around 12.1% (compared to the current Bloomberg consensus estimate of about 7.1%).

Similarly, Morgan Stanley also has a positive outlook on brokerage stocks. Their latest research report points out that if investors view the recent high daily trading volume as the norm, brokerage shares may experience a short-term surge.

If the momentum is strong enough, we believe that retail investors may consider 2 trillion RMB (the ADT in the two days before the A-share market closed) as the running rate, which could further increase the (brokerage stocks') earnings by 30%, with the ROE potentially reaching around 13%.

Goldman Sachs has upgraded its rating for insurance and other finance (such as brokerage, exchange, investment companies) to "overweight", expecting increased capital market activity and sustained asset performance improvement.

When will the rebound in real estate stocks end?

Goldman Sachs' research report last week pointed out that the recent rebound in Chinese real estate stocks is mainly driven by market sentiment, with investors having expectations for larger-scale fiscal stimulus policies and hopeful about the political bureau's call for "stabilizing expectations and stabilizing the economy".

The report points out that the current P/E ratio of state-owned real estate companies is 7.9 times, which has returned to the mid-term level before 2018. The P/B ratio of state-owned real estate companies is 0.68 times, while private enterprises are at 0.56 times. These valuation levels seem to have already reflected similar market environments before 2020.

JPMorgan believes that if the scale of fiscal stimulus is less than expected, or if real estate sales data begins to weaken, the market may start to profit-taking.

The report also points out that investors should focus on lagging stocks in the property management sector, where the fundamentals of these stocks are relatively solid, but valuations have dropped from a P/E ratio of 40 times to 15 times.

Consumer stocks reach a new starting point

After the Political Bureau meeting, multiple departments and local governments have launched plans and activities to boost consumption. Citi believes that the main purpose of these policy changes is to boost consumption, and it is expected to first have a positive impact on consumer stocks.

According to the latest Citi research report, if the government implements new fiscal stimulus measures in the future, along with the positive wealth effects brought by increased liquidity in the real estate market and stock market, in later stages, consumers' consumption of high-end or non-essential goods will also be boosted.

Specifically, Citi's preference order for the consumer goods industry is: dairy products > beer > condiments > beauty care. In the non-essential consumer goods industry, Citi is more bullish on household appliances, dining, and hotel sectors.

Internet, industrial, and medical care stocks are worth paying attention to

Morgan Stanley believes that as the Chinese stock market completes three stages of rebound, investors should focus on companies that may benefit from economic recovery, especially those with attractive valuations, large scale, and good liquidity stocks.

Among them, large internet companies and consumer stocks may become winners of the rebound due to their sensitivity to economic growth.

We believe that large internet companies and the broad consumer goods industry are well positioned due to their attractive valuations, nature of large-cap stocks, high liquidity, and exposure to re-inflation.

As companies increase investment, Morgan Stanley points out that stocks related to industrial, materials, and IT expenditure may also perform well. In terms of policies, any new social welfare measures, such as improvements in health insurance, could have a positive impact on medical care stocks.

In addition, Goldman Sachs has raised metals and mining to neutral weight and lowered telecommunication services to underweight.

By increasing the market weight of metals and mining, it adds cyclical exposure. This adjustment is driven by measures in the Chinese real estate market and potential fiscal stimulus, as well as a hedge against geopolitical risks.

On the contrary, due to its defensive nature, rising valuations, and lower sensitivity to interest rates, we have downgraded telecommunication services to underweight.

Editor / jayden