In 2024, the Chinese stock market experienced an annual gain, with A-shares and Hong Kong stocks rising by 15% and 16% respectively.

Goldman Sachs believes that Chinese stocks have demonstrated their investment value to domestic and foreign investors through actual performance. With policy support, the market has the potential for rapid rebound. Considering the lower sensitivity of A-shares to external factors, amid increasingly synchronized pricing of Global risk assets, Chinese stocks can provide diversification benefits for overseas investors and should occupy a place in investment portfolios.

Why should Chinese stocks have a place?

The team of Goldman Sachs Analyst Kinger Lau stated in a report on January 6 that the absolute and relative valuations of the Chinese stock market are currently at relatively low levels, reflecting a cautious attitude among investors. However, the performance of the Chinese stock market in 2024 shows investors the position it should have in their portfolios.

Analysts indicated that the overall increase in the Chinese stock market last year was primarily driven by a revaluation of the PE ratio, with the 12-month expected PE ratio expanding from 8.8 times at the beginning of 2024 to 10 times by the end. Considering the relatively optimistic policy expectations for 2025, the current valuation levels are expected to expand further.

The concentrated surge in April and September of last year indicated to investors that, with policy support, the Chinese stock market has the potential for rapid rebound and can bring substantial returns. The cost of shorting the policy bottom is high, especially when valuations are attractive and market positioning is relatively light.

Analysts emphasize that in recent years, the performance of Chinese stocks has primarily been influenced by domestic factors, showing relative low sensitivity to external factors. In other words, amid increasingly synchronized pricing of Global risk assets, the uniqueness of the stock market should provide asset allocators with diversification benefits.

At the same time, an active stock market may accelerate the reallocation of domestic institutions and retail investors' assets from Real Estate to Stocks. Theoretically, by increasing the exposure to more Stocks in the portfolio, investors' efficient frontier will expand.

Policymakers are also interested in promoting a healthy and well-functioning stock market, as this aligns with broader policy goals such as boosting market sentiment, creating wealth and domestic demand, and increasing fiscal revenue.

Investors should closely follow policy guidance when making trades.

Goldman Sachs also stated that investors should closely follow policy guidance when making trades.

Analysts believe that the policy support provided by the People's Bank of China for the stock market in late September—500 billion yuan in swap tools and 300 billion yuan for Share Buyback refinancing plans—can be described as unconventional and unprecedented. The central bank not only provides liquidity to market participants but also indirectly bears the stock risk through its balance sheet.

Although these measures will not create new base currency, they send a strong signal to investors that the central bank is willing to act as a lender of last resort to support the stock market. According to the latest disclosures, 105 billion yuan and over 50 billion yuan of the swap and refinancing tools have been applied for, accounting for 21% and 17% of the initial quotas, respectively, with the latter driving record Share Buyback in A-shares in 2024.

Editor/lambor