Goldman Sachs is bullish on Chinese stocks and expects them to rise by as much as 24% this year. Here’s what makes the company bullish on Chinese stocks.
Notably, Chinese stocks rebounded in Q4 2022 after the country lifted its controversial zero-COVID policy. While some Chinese stocks including names like Alibaba, NIO, and Baidu have come off their recent highs, they are up sharply from their 2022 lows.
Goldman Sachs strategists including chief China equity strategist Kinger Lau said in a note “we believe the principal theme in the stock market will gradually shift from reopening to recovery, with the driver of the potential gains likely rotating from multiple expansion to earnings growth/delivery.”
Goldman Sachs is bullish on Chinese stocks
They noted that COVID-19 is “arguably in the rear-view mirror” in China. Incidentally, recently China declared a “decisive victory” over coronavirus. Goldman Sachs expects the Chinese economy to grow 5.5% in the year led by strong growth in the second and third quarters of the year.
China’s GDP rose at an annualized pace of 3% in 2022 which was better than the 2.8% growth that analysts expected. The growth rate was however the second lowest since 1976 and the world’s second-largest economy fared poorly in only 2020 when it grew by a mere 2.2%.
China was officially targeting GDP growth of 5.5% in 2022. However, the target looked demanding at the very onset. As the year progressed it became amply clear that the country would not be able to meet the target.
Goldman Sachs meanwhile expects the Chinese economy to rebound in 2023. In their note, Goldman Sachs said, “The growth impulse should be heavily tilted towards the consumer economy, where services sector is still operating significantly below the 2019 pre-pandemic levels.”
Alibaba and Baidu to report earnings this week
This week, Alibaba and Baidu would release their earnings for the December quarter. The reports would provide more insights into the health of the world’s second-largest economy. Also, both Alibaba and Baidu are testing ChatGPT-like tools as the AI battle has intensified.
Google has opened up its conversational AI service Bard to trusted users as the company looks to protect its turf from OpenAI’s ChatGPT which many see as a major threat to the company.
However, the debut was disastrous as it gave wrong answers. Alphabet stock plunged as markets gave a thumbs down to Bard.
Hedge funds again see value in Chinese stocks
Coming back to Chinese stocks, Goldman Sachs said, “Hedge fund investors have substantially re-risked in Chinese stocks, predominantly in Offshore equities per GS Prime Brokerage, with their net exposures in China relative to their total equity exposures globally almost reverting to all-time highs.”
Notably, some of the other brokerages are also bullish on Chinese stocks after years of underperformance. According to Refinitiv data, the profits of Chinese companies with a market cap over $1 billion are expected to rise 16.2% in 2023, the fastest pace of growth since 2017.
China has signaled a thaw with private companies
Recently, China unveiled the rules for Chinese companies looking to list overseas. While the country’s securities regulator would have oversight on Chinese companies listing overseas under the new rules, it is nonetheless a positive move. It also signals that the country is now warming up to the private sector.
Chinese stocks rose on optimism over favorable policies
In 2021, Chinese stocks bore the brunt of the tech crackdown in the country. The country went after several sectors including delivery companies, gaming companies, and the Edtech sector. The country also tightened its antitrust policies and Alibaba was particularly targeted.
Chinese President Xi Jinping pushed forward with the “common prosperity” agenda to address the glaring wealth disparity in the country. However, as the Chinese Communist Party reverted back towards a more communist and socialist regime, it reversed some of the gradual opening of the economy that it had achieved over the last two decades.
Many analysts termed China as “uninvestable” as Xi Jinping tightened his grip on the polity and pushed for a more socialist agenda.
However, China has since reversed many decisions including giving up its zero-COVID policy. It also allowed downloads of Didi apps in the country while approving Ant Financial’s lending arm’s capital raise program.
Funds are bullish on China
Meanwhile, optimism toward Chinese stocks has risen among global investors. According to research firm EPFR Global, the total global inflows into Hong Kong and mainland Chinese stocks is running at the highest level since 2018.
Morgan Stanley also expects Chinese stocks to outperform their US counterparts this year. Notably, many fear a US recession in 2023 as the Fed continues to raise rates in order to tame inflation.
Many market participants are bullish on Chinese stocks amid expectations of a strong economic recovery in 2023. Also, many analysts find Chinese stocks undervalued as compared to global stocks.
Many find Chinese stocks undervalued
That said, many still investors still have scars of the 2021 tech crackdown in China which eventually led to the forced delisting of Didi.
The Chinese economy has slowed down structurally and the days of high single-digit growth seem to be over. Also, several sectors of the Chinese economy especially the real estate sector are facing severe headwinds.
Tensions with the US, which is its largest trading partner, are not making things any easier for China. Many companies including Apple are contemplating diversifying their production away from China. While there hasn’t been a mass exodus of foreign companies from China, most are now having second thoughts on over-reliance on China for their sourcing needs.