According to a recent note by Goldman Sachs Group Inc., the selloff in Chinese stocks since late January is expected to reverse. The investment bank’s strategists see the potential for the MSCI China Index to reach 85 points by the end of 2023, an increase of about 24% from Friday’s close. The expected surge in stocks is fueled by China’s reopening, which is predicted to deliver windfall profits for businesses.
While the rally in Chinese equities that began in November has lost momentum in recent weeks due to escalating geopolitical tensions and an uncertain economic outlook, bulls are optimistic that the upcoming political meeting and earnings will bring fresh impetus. The strategists wrote that “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,” and added that “the growth impulse should be heavily tilted towards the consumer economy, where the services sector is still operating significantly below the 2019 pre-pandemic levels.”
The note went on to say that the January-February macro statistics, the Two Sessions, and quarterly earnings from Chinese firms will be important factors to watch. Investors would likely require concrete evidence to confirm that fundamentals are indeed improving as the cycle transitions into growth. As such, market watchers expect the next leg of China’s reopening trade to be a slow grind as investors turn their attention to fundamentals.
Despite this cautious outlook, Chinese stocks climbed on Monday after three weekly declines. The Hang Seng China gauge advanced more than 0.9%, while the onshore CSI 300 benchmark rose 1.2%. Construction-related shares were among the biggest boosts to the onshore gauge, alongside telecommunication stocks.
Investors are also keeping an eye on developments in Sino-American relations after a meeting between US Secretary of State Antony Blinken and China’s top diplomat exposed rifts between the two nations over thorny issues. The ongoing tensions between the two nations are expected to impact the Chinese stock market to some degree, but many investors and market watchers believe that the anticipated economic recovery and increasing earnings will outweigh any negative impact from geopolitical tensions.
In conclusion, the note from Goldman Sachs Group Inc. provides a cautiously optimistic outlook for the Chinese stock market. While the recent selloff and escalating geopolitical tensions have caused some concern, the investment bank’s strategists are confident that China’s economic reopening will bring windfall profits for businesses, leading to a surge in stocks. However, market watchers and investors will need to keep an eye on macro statistics, political meetings, and quarterly earnings to confirm that fundamentals are improving as the cycle transitions into growth.