The Paper | Positive Outlook for the Fourth Quarter! Multiple Foreign Institutions Raise China's Economic Forecast and Advocate Overweighting Chinese Stocks

Translated from The Paper

Multiple foreign institutions have expressed optimism towards Chinese assets.

Recently, foreign institutions such as Goldman Sachs, J.P. Morgan, Fidelity International, and Deutsche Bank have successively released their latest perspectives, bolstering their outlook on China's economic growth and exhibiting confidence in the performance of the Chinese stock market.

Timothy Moe, Chief Asia Pacific Stock Strategist at Goldman Sachs, has advised various clients, including traditional clients and hedge funds, suggesting a tactical overweight in Chinese stocks. Even short-term rebounds can be quite attractive. In the medium term, the MSCI China Index could generate a return of approximately 15% in the next 12 months.

Raising forecasts for China's economic growth

In recent times, several foreign institutions have raised their forecasts for China's economic growth.

Zhu Haibin, J.P. Morgan's Chief China Economist and Head of Economic Research for Greater China, stated that considering the better-than-expected economic data in August and the gradual transmission of policy support, including the accelerated issuance of special bonds by local governments, which may promote infrastructure construction activities, he has raised his expectations for China's economic growth in the second half of the year and predicts that China's annual economic growth will reach 5%.

Citigroup has raised its growth outlook for China in 2023 to 5%, indicating consensus on the hope for positive data driving the achievement of China's growth targets.

Citigroup believes that retail and industrial production may improve. Surveys showed that the manufacturing sector was in expansion territory for the first time in months, and the decline in exports may also decrease. "The cyclical bottom has already formed, and everyone is looking at whether effective demand will rebound under increased policy stimulus."

Xiong Yi, Deutsche Bank Group's Chief China Economist, released a research report on China's macroeconomic landscape, saying that the effects of counter-cyclical adjustment are becoming increasingly evident, and the Chinese economy is gradually stabilizing. He predicts that the economy will gradually rebound in the fourth quarter of this year, with an expected growth rate of 5%. The GDP growth forecast for the whole year of 2023 is 5.1%.

Xiong Yi said that since mid-August, following China's strengthened counter-cyclical adjustments and policy reserves, a series of encouraging signals have gradually emerged. Current data suggests that the Chinese economy is gradually stabilizing and recovering.

Luca Paolini, Chief Strategist at Pictet Asset Management, also believes that China is displaying initial indicators of economic recovery. He observes that short-term stabilization appears to be taking place in consumer activity, with retail sales still trailing the trend level by 16%, while household savings surpass the trend by 20%. This suggests ample room for significant improvement in consumption. Real estate recovery is a crucial piece in boosting consumer confidence.

Fidelity International pointed out that Asia has become a bright spot for investment, with the market closely watching China's economic recovery. Marty Dropkin, Head of Equities for Asia Pacific at Fidelity International, has remarked, "Despite many challenges, we still witness robust growth among various enterprises in China. Overall weak consumption data masks the prosperity of the service sector. Under the impetus of industries such as tourism, catering, and leisure and entertainment, the service industry in China has seen an overall growth of 19% from the beginning of the year to August. Further stimulus measures are expected to boost consumer confidence, and China has huge potential for consumption recovery."

Valuation may have bottomed out

Regarding Chinese equity assets, several foreign institutions have stated that the current valuation of the Chinese stock market may have bottomed out, and they are optimistic about the potential for upward trading opportunities in the fourth quarter of this year.

The Goldman Sachs Research's equity strategy team recently published a research report analyzing the Chinese stock market. The report states that the total market capitalization of the Chinese stock market is currently approximately 14 trillion US dollars, with a daily trading volume of approximately 139 billion US dollars. The market can be categorized into three regions: Chinese Mainland, Hong Kong, and US-listed China concept stocks, constituting 76%, 18%, and 6% of the total market capitalization of all listed companies, and 90%, 5%, and 4% of the total cash trading volume, respectively.

Goldman Sachs points out that the macro fundamentals and market drivers are theoretically similar for Chinese listed companies across these three regions, but the micro market structure, regulatory system, investor structure, and liquidity conditions are significantly different. A-share performance is usually driven by economic growth and accommodative policies. In contrast, Hong Kong stocks and US-listed China concept stocks are more sensitive to geopolitical and global liquidity factors due to the larger proportion of international investors.

Timothy Moe stated that he has advised various clients, including traditional clients and hedge funds, suggesting a tactical overweight in Chinese stocks. Even short-term rebounds can be quite attractive. In the medium term, the MSCI China Index could generate a return of approximately 15% in the next 12 months.

Goldman Sachs Research's report also shows that it maintains an overweight rating on A-shares and Hong Kong stocks, but tactically prefers the offshore market due to more attractive stock valuations. Based on recent southbound fund flows, the Hong Kong stock market may rebound before the end of the year.

According to Goldman Sachs Research's model, the MSCI China Index could achieve a 9% increase in the next three months, with the Hang Seng Tech Index expected to outperform all other major indices.

"Strategically, our preference for A-share allocation remains strong, as the A-share market demonstrates lower sensitivity to geopolitical and liquidity factors. Goldman Sachs Research is optimistic about themes or sectors that are supported by policies and have a greater impact on economic growth targets, such as autonomous and controllable technologies, SRDI 'little giants', new infrastructure, renewable energy, electric vehicle supply chains, and mass consumption," Goldman Sachs Research's report pointed out.

Nomura Securities also recently published a report conveying its positive outlook on the investment value in the Chinese market, with signs of improvement in economic data and supportive policies. The government has sent clear signals to revitalize the economy, financial markets, and confidence. Nomura Securities believes that investors should focus on industries that benefit from cyclical recovery and structural opportunities, including renewable energy, electric vehicles, and high-tech stocks, and maintain a "tactical overweight" view on Chinese stocks.

Translated from The Paper. The views in this article do not represent those of the SSE.