Source: Wall Street See
Goldman Sachs believes that the profit correction trend in the Chinese market has stabilized. They will maintain a shareholding position in the internet plus-related industry, service industry, and dining industry. It is expected that A-shares may outperform H-shares in the next three months, and the EPS of the MSCI Chinese Index in the following two years is expected to grow by 12% each.
After the historic surge at the end of September, the market is focused on: How will the Chinese market move next?
On November 4, Goldman Sachs analysts Kinger Lau and Timothy Moe released a research report titled "Policy waiting game", with the team stating that the rebound in the Chinese market at the end of September has more support than before, continuing to be bullish on the Chinese market.
In the report, Goldman Sachs maintained its "shareholding" rating for A and H shares, expecting potential return rates of around 20% for both over the next 12 months, and anticipating that the performance of A shares in the next three months may outperform H shares.
In terms of profitability, Goldman Sachs expects that considering continued policy efforts, better-than-expected third-quarter performance of A shares, a stabilizing correction trend, the EPS of the MSCI China Index in the next two years is expected to grow by 12% respectively.
Goldman Sachs: Bullish on the Chinese market, A shares may outperform H shares in the next three months
Specifically, the report states that relevant indicators compiled by Goldman Sachs show that concerns related to the US election tariffs seem to have been partially absorbed by the Chinese market, such as the intensified bilateral trade tensions implied by the stock market, and the recent poor performance of China exporters oriented towards the United States.
Secondly, in terms of supportive policies, the report states that compared to monetary policy, China's stock market is expected to react more positively to the forthcoming fiscal incremental policies.
Last month, the report from the Institute of Finance of the Chinese Academy of Social Sciences suggested issuing 2 trillion yuan of special national bonds to support the establishment of a stock market stabilization fund, to promote market stability through buying low and selling high blue-chip leading stocks and ETFs.
Goldman Sachs stated that if funded by fiscal resources, the establishment of the fund might need to go through the legislative process of the National People's Congress. Once completed, it could supplement or replace the 'national team'. According to Goldman Sachs estimates, as of the first half of 2024, the 'national team' holds A-share stocks worth over 4.5 trillion yuan.
In terms of profitability, the report states that under the impact of the positive policies already launched, the earnings correction trend of A shares and H shares has stabilized, and it is expected that the strong macro growth in the fourth quarter will benefit the revenue growth and profitability of the remaining year.
Therefore, Goldman Sachs maintains its 'shareholding' rating for A shares and H shares in the report, expecting a potential ROI of around 20% for both over the next 12 months. Additionally, according to the A-H market rotation framework developed by the bank, in the scenario where A shares have underperformed H shares for most of this year, A shares are expected to perform better in the next three months.
Furthermore, Goldman Sachs still maintains a forecast of 12% EPS growth rate for 2024, partly due to the low base in the fourth quarter of last year, and anticipates a 12% EPS growth in 2025.
In terms of industries, it currently appears that the Chinese internet sector continues to be a major contributor to the upward adjustment of profitability, and the recent market performance of non-bank financial stocks has been impressive. Looking ahead, based on various growth and policy reasons, Goldman Sachs states a preference for consumer-type industries over manufacturing industries, hence maintaining a shareholding stance on the internet, service, and dining industries.
The report indicates that the rapid rise of the current Chinese stock market is triggered by a package of incremental policies in monetary, fiscal, real estate, and stock markets. As China's market valuation continues to rebound, investors' attention will focus on the upcoming results of the US presidential election and the evaluation by the Standing Committee of the National People's Congress on the rebound path and sustainability of the stock market in this round.
Despite the cooling of FOMO sentiment, retail investors still have room to increase their shareholding.
In terms of funding, the report concludes that hedge funds began to take profits from early October, while mutual funds still have a low allocation to the Chinese stock market, and domestic individual investors have not yet reached an exuberant level.
According to statistics from Goldman Sachs, in the recent rebound, the net exposure of hedge funds to Chinese stocks surged to 10% at its peak (from 6% in mid-September), and then fell to around 8% currently. 80% of the buying volume since September 24th has been closed, with hedge funds.
The Retail Sentiment Barometer compiled by the bank also shows that the risk appetite of A-share retail investors has indeed improved, but there is still a gap from the exuberant level.
The report predicts that domestic individual investors still have "considerable space" to increase their stock holdings, mainly considering the large amount of excess household savings (Goldman Sachs estimates about 46 trillion RMB), the depressed real estate market, the boost from the central bank's interest rate cuts, and strong policy support for the stock market.
Editor / jayden