China stocks have bottomed out after a year-long correction and are poised to gain up to 14% over the next 12 months, Goldman Sachs said.
The driver of the upside potential is China’s policy easing, which comes exactly as much of the rest of the world is tightening, said analysts led by Hong Kong-based Kinger Lau in a June 13 note.
We “like the tactical case, especially in the run-up to the Party Congress, ahead of which the stock market has tended to trade well historically,’’ he said. “Monetary, fiscal, property, regulation and Covid’’ policies have all seen loosening, he added.
Despite an almost 6% rise in the CSI 300 index since a March 15 low this year, Lau said history shows that returns are usually strong at current valuation levels. This year’s market recovery is on par with the historical market rallies after hitting bottom, with stocks rebounding on average by 42% and 59% over six and 12 months, respectively, he said.
Goldman sees economic growth accelerating to 5% in the third quarter from 1.5% during the current three months, and says early indications of recovery are promising. Shanghai’s manufacturing activity has almost recovered to pre-lockdown levels, suggesting growth momentum should start to firm in the coming quarter, Lau said. May economic data also improved from a month earlier as exports and credit growth exceeded expectations.
That contrasts with growth momentum for developed economies and emerging markets, which Goldman believes “could slow further in the second half due to high base effects, geopolitical uncertainties, and a worsening inflation/policy mix.”
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Overweight China Stocks
Risks over the outlook include the duration and implementation of China’s zero Covid policy, potential leadership changes at the Party Congress later this year, and high systemic leverage, he said. Geopolitical risks and demographic factors are additional risks, he said.
But given China’s relatively more favourable macro policy versus the rest of the world, inexpensive valuations, and “stubbornly light positioning’’ in investor portfolios, Goldman is overweight on China stocks in the region.
Lau also sees potential for a further re-rating of internet stocks, which have led the recent market rally, as regulations over delistings in the US, overseas listings and capital raising arrangements, are further clarified.
News last week that the Cyberspace Administration was about to conclude its probe into Chinese internet companies and that the online gaming regulator had issued a second batch of licence approvals for 60 new games were a sign that “the regulatory tightening cycle is naturally transitioning” to a stage where investors can “price the regulation impacts via earnings and risk premium,” Lau said.
“We’d continue to focus on specific policy beneficiaries to monetise the government put option,’’ he said. “Notably, fiscal stimulus beneficiaries, SOE developers, capital-centric strategies in the internet space, and Covid recovery beneficiaries.’’
• By Kevin Hamlin and Jim Pollard
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