4 reasons China’s blistering stock rally has another 20% to run, Goldman says

Goldman Sachs predicts that the blowout surge in China’s stock market still has a ways to go, with another 15% to 20% upside ahead.

It’s a standout call for a market that has already impressed in recent weeks. Despite the short length of the Chinese rally, the MSCI China Index is up by more than 34% in the year to date, surpassing gains for the US benchmark S&P 500.

“The significant gains in the equity market have been driven by two key factors: the catalyst of more substantial policy measures and the starting conditions of an oversold and under-positioned market backdrop,” Goldman said.

That’s a reference to a sweeping set of policies Beijing introduced in late September, signaling the government’s seriousness about tackling China’s lagging economy. Measures included liquidity boosts, interest-rate easing, reserve-ratio-requirement cuts, and mortgage-rate support.

Goldman detailed four reasons to support its forecast of 15% to 20% upside for Chinese stocks.

First, valuations have room to expand if Beijing commits to its policy support. Even though they’ve recovered from a low of 8.4 times forward earnings, valuations remain below a five-year mean of 12.1 times, Goldman said. It added that fiscal easing often corresponds with expanding valuations.

Second, China’s recent policy announcements likely clamp down on investment risk. Before Beijing delivered its forceful stimulus blitz, the market’s implied cost of equity was elevated, indicating lingering concern about downside risk. China’s commitment to its new policies should ease this measure.

Third, earnings growth could pick up if the economy responds well to China’s latest support measures. Goldman is optimistic in this outcome, estimating that the central bank’s policy easing could lift China’s GDP by 40 basis points.

“Our economists currently forecast GDP growth of 4.7% and 4.3% for 2024 and 2025 but note that the announced and indicated measures reduce downside growth risks inherent in recent monthly activity data,” the bank said.

Fourth, equity positioning is light, leaving room for more market entrants that could push stocks higher, Goldman said.

With risk appetite returning to onshore and foreign investors, market participation is rising from low levels. But even as traders snap up Chinese equities, their exposure remains lax. For instance, mutual funds were 310 basis points underweight China at the end of August, Goldman said; the rally’s jump-start only deepens this figure.

Still, while Goldman said efforts so far had been very stocks-positive, it’s not willing to declare that a structural bull market has begun. It said China continues to suffer major challenges, including low consumer spending and an indebted property market. Some analysts have argued that even more support is necessary, especially fiscal stimulus.