- “We believe the main theme in equity markets will gradually shift from reopening to recovery,” Goldman Sachs said in a statement Monday.
- As of Friday’s close, the MSCI China Index was down about 8% from its peak on Jan. 27. This puts it close to the market correction zone, which is typically defined when an index falls more than 10% from its recent high.
BEIJING, CHINA – FEBRUARY 9: Citizens walk in the snow at Wangfujing Pedestrian Street on February 9, 2023 in Beijing, China.
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Goldman Sachs strategists see an economic shift from “reopening to recovery” that will propel Chinese stocks up as much as 24% by the end of this year.
The company sees a potential upside of 24% for the MSCI China index as the country moves into a growth phase after reopening, which followed its strict zero-Covid policy, according to a note on Monday.
“We believe the key theme in the stock market will gradually shift from reopening to recovery, with the potential earnings driver likely to pivot from multiple expansion to earnings growth/delivery,” said Goldman Sachs strategists, including chief strategist for Chinese stocks, Kinger Lau, in the note.
Chinese stocks entered bull market territory around Lunar New Year earlier this year – the MSCI China Index peaked almost 60% in late January from October’s lows.
As of Friday’s close, the index was down about 8% from its Jan. 27 peak. This puts it close to the market correction zone, which is typically defined when an index falls more than 10% from its recent high.
MSCI China tracks more than 700 Chinese stocks listed worldwide, including Tencent, BYD and Industrial and Commercial Bank of China. Goldman Sachs lowered its earnings outlook for the index to zero growth in July.
The moves will be “reminiscent of a transition from hope to growth phase in a typical stock cycle,” they wrote, adding that Covid is now “arguably in the rear-view mirror” in China.
The latest Buying Manufacturers Index as well as consumption levels show “clear signs of normalization in activity, albeit from a low base,” the strategists wrote.
Goldman Sachs expects China’s economy to grow 5.5% in full-year 2023, driven by growth in the second and third quarters, which they now put at 9% and 7%, respectively.
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“The growth impetus should be heavily focused on the consumer economy, where the service sector is still well below pre-pandemic levels of 2019,” they wrote, noting that Chinese households will have excess savings of more than 3 trillion yuan ($437 billion) this year US dollars) have .
The strategists added professional speculators are showing a greater appetite for Chinese stocks, citing data from the firm’s prime brokerage.
“Hedge fund investors have found significant renewed exposure to Chinese equities, predominantly offshore equities according to GS Prime Brokerage, with their net exposure to China relative to their total global equity exposure returning to near all-time highs,” they wrote.