Goldman Sachs, UBS, BNP more positive on Chinese stocks as chorus of favourable sentiment grows in run-up to July plenum

Goldman analysts say A share valuations may rise by 40 per cent, while UBS raised its rating on the MSCI China Index and Hong Kong stocks to overweight
DBS Bank says valuation gap between Hong Kong stocks and US stocks has reached the widest on record

Banking & finance

SCMP

Published: 7:30am, 6 May 2024

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Investment banks including Goldman Sachs, UBS and BNP have become more positive on stocks in China, with foreign selling having subsided.

Foreign investors were net buyers of Chinese stocks for a third straight month in April, the longest streak of foreign buying in a year. Global emerging market funds rolled back their underweight position on mainland China stocks and turned neutral, HSBC said in a report last month.

Some international hedge funds have shifted their investment positions from US or Japan stocks to China stocks over the past week, Japanese investment bank Daiwa Capital Markets said in a report.

Goldman Sachs said changes are afoot in China that point to a potentially stronger risk appetite and a more conducive trading environment for A shares in the near term, after China’s State Council, or cabinet, issued a nine-point guideline last month to prop up the US$9 trillion stock market.

An aerial view shows residential buildings with roof-mounted photovoltaic solar panels in Yinchuan, in northwestern China’s Ningxia region on March 31, 2024. Photo: AFP

The new guidelines stress the quality of listed companies, regulatory supervision and investor protection, marking a shift from a focus on development in previous policy frameworks.

Goldman analysts said valuations for the yuan-traded stocks, also known as A shares, may expand by as much as 40 per cent if China’s market manages to close gaps with global leaders in terms of factors including dividend payouts, buy-backs, corporate governance and institutional ownership after the sweeping reforms.

Joining the bull camp, UBS raised its rating on the MSCI China Index and Hong Kong stocks to overweight last month, citing earnings resilience and policy support. That reversed its decision in August to downgrade the rating on Chinese stocks to neutral.

Last week, BNP Paribas upgraded its view on the MSCI China index by adopting the bull case as the new base scenario, suggesting a 4 per cent additional upside from current levels.

The Hang Seng Index gained 4.7 per cent last week and has risen 20 per cent from a January low, entering what is defined as bull-market territory.

China’s onshore stock exchanges reopen on Monday after a weeklong break and could post gains after top policymakers signalled further support for economic growth at the Politburo meeting on April 30.

That meeting also decided that the Central Committee of China’s Communist Party will hold its third plenum in July, a long-anticipated meeting where the country’s leaders are expected to release a plan for reform that will chart a sustainable growth path and address economic difficulties.

“Looking ahead, we believe the broader index may gradually rise further over the next one to two months, as investors anticipate the potential structural reform measures to be introduced at the long-awaited third plenum,” said BNP’s note published last week.

Recent macro data from the world’s second-largest economy has indicated, albeit tentatively, that the trough of the economic downturn may now be in the rear-view mirror. There is a growing sense that China can still hit the 5 per cent GDP growth target even though the economy has yet to begin firing on all cylinders.

“The Chinese economy could be ready to turn the corner, in which case current valuations would make for an attractive entry point,” said Tim Waterer, chief market analyst at KCM Trade.

Still, an unresolved property crisis, deflationary risks and tepid consumer demand mean global investors are yet to make a structural shift and go “all in,” analysts said.

“The elephant in the room remains the property sector woes, particularly given the oversized impact that this sector has on the Chinese economy, accounting for more than 25 per cent of GDP,” said Waterer, adding that investors may want to see some better data domestically before ramping up their China exposure further, pointing to inflation data which is still borderline deflationary and muted domestic demand.

“The April Politburo meeting statement reflected a strong commitment to stimulate growth, especially in the discussion on potential property destocking measures,” the BNP note said.

“The Politburo meeting statement also endorsed the phrase ‘growing patient capital’ for the first time, following the CSRC proposing this term late last year. This indicates there will be more follow-up measures to improve long-term funds participation in capital markets and strategically important industries, benefiting our China high dividend and buy-back themes.”

DBS Bank analysts said over the weekend that cheap and under-owned Chinese equities appear to be a decent hedge for global investors. Meetings with foreign investors also indicated growing interest in Chinese equities, while outflow from US-domiciled investors had stabilised, suggesting that their adjustments from last year are largely complete, DBS said.

“The valuation gap between Hong Kong stocks and US stocks has reached the widest on record,” they said.

Daiwa Capital Markets said that although the recent rally had been mostly driven by fund flows and sentiment, rather than fundamentals, it was a good start for the return of foreign capital.

“While China stocks do not appear ready for a multi-year rally, the significant outperformance of US and Japan equities over A-share and Hong Kong ones over the past two years should narrow in 2024, in our view,” they said.