Goldman Sachs raised its target price for MSCI China from 66 to 84 and its target price for the CSI 300 Index from 4000 to 4600. In terms of industry allocation, Goldman Sachs raised insurance and other financials to overweight, metals and mining to neutral, and telecommunications services to underweight.
After the epic surge in China's stock market, institutions at home and abroad remain bullish.
On October 5, Goldman Sachs upgraded the Chinese stock market to "overweight" in its latest report, predicting a further increase of 15-20%. Goldman Sachs raised the target price of MSCI China from 66 to 84, and the target price of the CSI 300 Index from 4,000 to 4,600.
In terms of industry allocation, Goldman Sachs upgraded insurance and other financials to overweight, metals and mining to equal weight, and downgraded telecommunications services to underweight.
There is an estimated 15-20% upside potential.
Goldman Sachs believes that China's stock market still has further upside potential, estimating that there is still room for an increase of 15-20%:
There is not enough information to assert that a structural bull market has begun, as macro challenges remain daunting and the size and contours of fiscal policy have yet to be announced. However, there are good reasons to think that there will be additional gains in the stock market.
Goldman Sachs raised its target price for MSCI China from 66 to 84 and for the CSI 300 from 4,000 to 4,600, based on forward valuations of 12.0x and 14.2x, respectively (previously 10.5x and 12.8x, respectively). This implies a total return upside of about 15-18% from current levels.
Goldman Sachs came to the above conclusion based on valuation, earnings, positions and other factors:
First, after recovering from the extremely low level of 8.4 times, the valuation is still below the median forward earnings of 11.3 times, and 0.4 standard deviations below the 5-year average of 12.1 times. If economic support policies continue to follow up, there is potential for further valuation recovery. From an empirical point of view, Goldman Sachs has noticed that fiscal easing is well correlated with valuation expansion.
Second, the market's rebound can be seen as pricing out tail risks. Goldman Sachs' Dividend Discount Model (DDM) shows that the implied cost of equity (ICOE) of the stock market has been at a high level recently, indicating that the market is concerned about downside risks to growth. A series of powerful policy measures have reduced this risk and should lead to a lower ICOE. This supports expectations for further valuation recovery.
Third, if the economy responds to policy, earnings growth could improve from current conservative forecasts. Improving earnings also tend to support valuation expansion.
Finally, light positioning and a change in outlook for Chinese stocks point to further re-risking. Hedge funds have rapidly increased exposure to China, but remain at the 55th percentile of their 5-year range. For reference, at the peak of the rally in January 2023, they peaked at the 91st percentile. As of the end of August, mutual funds were 310 basis points underweight to China, and the sharp market moves will increase this underweight. Onshore investors have also begun to increase margin financing at low levels, echoing the rise in risk appetite during the 2015 policy support.
From a broader perspective, Japanese stocks have seen seven rallies of 50-140% during their nearly 30-year bear market, suggesting that attractive investment opportunities can coexist with a challenging macro backdrop.
Goldman Sachs upgrades insurance and other financials to overweight
Goldman Sachs raised its allocation to China to overweight and said the increase was tactical:
The upward revision reflects the potential for further gains driven by policy and its reflexive impact on sentiment and confidence, but continued evidence of implementation and progress in addressing macro challenges is needed to take a more confident longer-term stance.
For industry allocation, Goldman Sachs upgraded insurance and other financials to overweight, metals and mining to neutral, and telecommunications services to underweight:
We upgrade insurance and other financials (e.g., brokerages, exchanges, investment companies) to overweight given increased capital market activity and improved asset performance.
In addition, cyclical exposure was increased by moving metals and mining up to market weight, a move driven by measures in China’s property market and potential fiscal stimulus, and also as a hedge against geopolitical risks.
Conversely, we downgrade telecom services to underweight due to its defensive nature, elevated valuations and lower sensitivity to interest rates.
Goldman Sachs maintains its overweight stance on internet and entertainment, technology hardware and semiconductors, consumer retail and services, and daily necessities. Goldman Sachs believes that these industries are expected to benefit from loose policies, provide structural growth opportunities (such as artificial intelligence and China's unique consumption trends), are more sensitive to lower interest rates, and have valuations ranging from reasonable to attractive.
The views expressed in this article represent only the author’s personal views and do not constitute investment advice. I do not make any guarantees about the accuracy, completeness, or timeliness of the information in the article, nor am I responsible for any losses arising from the use or reliance on the information in the article.
