By The blowout surge in China’s stock market still has ways to go, with another 15% to 20% upside ahead, Goldman Sachs predicts.
It’s a standout call for a market that has already impressed in recent weeks. Despite the short length of the Chinese rally to date, the MSCI China Index is now up more than 34% year-to-date, surpassing gains for the US benchmark S&P 500.
“The significant gains in the equity market have been driven by two key factors: the catalyst of more substantial policy measures and the starting conditions of an oversold and under-positioned market backdrop,” Goldman said.
That’s a reference to a wide-sweeping set of policies Beijing introduced in late September, signaling the government’s seriousness about tackling China’s lagging economy. Measures included liquidity boosts, interest-rate easing, and reserve-ratio-requirement cuts, as well as mortgage-rate support.
Looking forward, Goldman detailed four reasons to support its 15%-to-20% upside forecast for Chinese stocks.
First, valuations have room to expand if Beijing commits to its policy support. Even though they have recovered from a low of 8.4 times forward earnings, valuations remain below a five-year mean of 12.1 times, Goldman said. It added that fiscal easing often corresponds with expanding valuations.
Second, China’s recent policy announcements likely clamp down on investment risk. Before Beijing delivered its forceful stimulus blitz, the market’s implied cost of equity stood at elevated levels, indicating lingering concern of downside risk. China’s commitment to its new policies should ease this measure.
Third, earnings growth could pick up if the economy responds well to China’s latest support measures. Goldman is optimistic in this outcome, estimating that the central bank’s policy easing could uplift China’s GDP by 40 basis points.
“Our economists currently forecast GDP growth of 4.7% and 4.3% for 2024 and 2025 but note that the announced and indicated measures reduce downside growth risks inherent in recent monthly activity data,” the bank said.
Fourth, equity positioning is light, leaving room for more market entrants that could push stocks higher, Goldman said.
With risk appetite returning to onshore and foreign investors, market participation is rising from low levels. But even as traders snap up Chinese equities, their exposure still remains lax. For instance, mutual funds were 310 basis points underweight China at the end of August, Goldman said: the rally’s jumpstart only deepens this figure.
Still, while Goldman said efforts so far have been very stocks-positive, it’s not yet willing to declare that a structural bull market has begun. It cited that China continues to suffer major challenges, from low consumer spending to an indebted property market. Some analysts have cited that even more support is necessary, especially fiscal stimulus.
