Goldman Sachs believes that under the combined effect of policy stimulus, improvements in corporate earnings, and share buybacks, the Chinese stock market is expected to rebound next year, with the msci chinese index and csi 300 index expected to rise by 15% and 13% respectively by 2025.

In the short term, Goldman Sachs favors A-shares more. Analysts believe that compared to Hong Kong stocks, A-shares are more sensitive to policy easing and the flow of individual investment funds. Due to overseas factors and the implementation of domestic policies, the first quarter of next year will be a better time to allocate to Hong Kong stocks. In terms of sectors, analysts suggest that investors focus on themes such as consumer areas, exporters in emerging markets, specific new technologies, and shareholder return strategies.

"The most extreme risk scenarios have been eliminated."

Goldman Sachs' chief China equity strategist Kinger Lau's team stated in the annual strategy report on November 18 that under policy stimulus, domestic consumption and certain investment areas are expected to grow next year. Benefiting from more targeted fiscal spending and consumer subsidies, the recovery of the service industry, and the positive wealth effect brought by rising financial asset prices, consumption growth is expected to rebound from 3.8% this year to 5% next year.

Goldman Sachs stated that since the Politburo meeting in September, the most extreme risk scenarios have been eliminated:

As conveyed in the September briefing, the policy objective has shifted from curbing risks to maintaining growth.

Policy responses should be coordinated and delivered as a package rather than in a fragmented manner.

Policies are increasingly focusing on demand-side measures, which means that the multiplier effect of policies may lean more towards domestic aspects, with lower external spillover effects.

Stimulus measures are led and initiated by the central government and the central bank, and unprecedented innovative measures have been taken to boost the stock market.

Goldman Sachs believes that investors have transitioned from the 'expectation phase' of policies to the 'confirmation phase', meaning detailed policy information is needed to further enhance confidence.

Analysts expect further easing of monetary policy next year, including reductions in reserve requirements and interest rates, with fiscal deficits continuing to expand to support real estate destocking, local government debt swaps, bank capital restructuring, and stimulate consumer investment.

The expansion of fiscal deficits also drives corporate profitability. Goldman Sachs estimates that each increase of 1 trillion yuan in fiscal deficits (equivalent to 0.8% of GDP) could push EPS growth by 2 percentage points the following year.

Regarding the export issue that the market is concerned about, Goldman Sachs currently expects that export volume in 2025 will remain basically flat based on the high base in 2024, and the growth in exports to other countries will offset the adverse effects on exports to the U.S.

From an economic theme perspective, Goldman Sachs believes that under policy support, consumption and infrastructure could become key contributors to market profits, and as the low base effect begins to take effect, the drag of the real estate market on profits might ease. In certain scenarios, policy-driven supply-side reforms could also benefit capital-intensive industries such as autos, cecep solar energy, and some others through healthier profit margins.

The influence of foreign capital has weakened, and domestic capital will play a dominant role.

Goldman Sachs believes that considering the current under-allocation of foreign investment in the china market, the impact of domestic investment on the market may further expand next year.

After 2020, overseas hedge funds have experienced several rounds of rapid fluctuations in their allocation in the china market, with current net long/total exposure at 7.1%/5.6%, standing at the 11%/22% percentile of the 5-year average, reflecting a continued focus on short-term opportunities. In terms of long-term funds, global 3.5 trillion dollars in mutual fund assets are also inadequately allocated in china stocks.

However, benefiting from 45 trillion yuan of household savings surplus and regulatory support, domestic investors have significant potential to increase stock allocations. The national team accounts for about 5.4% of the market cap of A-shares and may further increase participation through the national stabilization fund in the future.

Share buybacks by listed companies will also be bullish for the stock market. In the third quarter of 2024, the total amount of share buybacks in China's A-shares and H-shares markets reached historical highs of 23 billion dollars respectively. Goldman Sachs predicts that the total buybacks in 2025 will nearly double to 70 billion dollars, mainly benefiting from policy promotion (300 billion yuan re-loan support from the central bank), robust operating cash flow, and still high equity capital costs.

In the short term, a bullish outlook for A-shares, while waiting for the Hong Kong market until the end of the first quarter.

Goldman Sachs believes that A-shares and Hong Kong stocks are still at relatively low valuation levels within the global equity landscape, making them very attractive.

Currently, the MSCI Chinese index has discounts of 46% and 23% compared to developed markets (DM) and emerging markets (EM e-China) stocks excluding china, respectively. Although next year's profit growth may be similar or even better, these two discount levels remain high relative to their historical ranges.

Goldman Sachs expects that the adjustment of capital flows triggered by policy may accelerate in 2025, with companies, domestic individual investors, southbound capital, and government-related investment institutions possibly increasing their stock holdings. The MSCI Chinese index and the csi 300 index are expected to rise by 15% and 13% respectively next year, with earnings per share (EPS) growth at approximately 7% and 10%.

Due to greater sensitivity to policy easing and less impact from external risks, Goldman Sachs is more inclined toward A-shares in the short term. Goldman Sachs expects that the trading improvement in stocks listed in Hong Kong will have to wait until the end of the first quarter of 2025, by which time the clarity regarding overseas risks and domestic policy easing may be more evident.

Industry allocation: Follow the consumer.

In terms of industry allocation, Goldman Sachs suggests that investors focus on themes such as government consumption, exporters in emerging markets, selected new technologies, and shareholder returns.

Goldman Sachs stated that under policy-driven circumstances, government consumption expenditures are expected to significantly rebound, benefiting sectors including autos, retail/services, medical devices, and infrastructure projects. Areas supported by the government such as the digital economy, green energy, and intelligent manufacturing are also deserving of special attention.

Goldman Sachs particularly emphasizes that despite the strong market roi achieved over the past year in sectors focusing on shareholder returns such as high dividends, this theme will still be worth investor attention in 2025:

Currently, there are clear policies and delivery methods to enhance shareholder returns; the ability of listed companies to return cash to shareholders seems promising.

Nearly 50% of the market cap of listed state-owned enterprises is held by government-related entities; for every 1% increase in the dividend payout ratio, fiscal revenue can increase by 23 billion yuan.

The decline in china's bond yields has increased the attractiveness of immediate cash returns; domestic institutional investors reducing their stock holdings may exhibit structural demand for stable income.

More dividend-oriented etfs have been raised, thereby increasing the demand for high-yield stocks.