Goldman joins China-equity bull party after missing rally

HONG KONG • Goldman Sachs Group is joining the rush on Chinese shares, becoming the latest major brokerage to upgrade the market, thanks to mounting evidence of strength in the largest Asian economy.

The bank's strategists are now overweight Chinese stocks, with their 12-month forecast for the MSCI China Index boosted to 73 points from 68, according to a note from Goldman analysts yesterday. That represents a gain of almost 25 per cent for this year. The MSCI China gauge has already climbed 11 per cent this year, outpacing the wider Asian region and the 5.6 per cent advance in global stocks.

Improving economic data has burnished the appeal of Chinese assets since Goldman lowered China to market-weight on Dec 1 last year.

Analysts anticipate that policy measures will continue to be supportive, given the twice-a-decade Communist Party conclave later this year, when a reshuffle among senior ranks is expected. "Policy and growth dynamics should stay conducive leading up to the 19th Party Congress," the analysts wrote.

Goldman's upgrade was also underpinned by analysts upgrading their forecasts twice in a month, with their outlook for earnings per share gains at 13 per cent for this year and 11 per cent for next year. Recent declines in both Hong Kong and Chinese markets have provided a better entry level.

Goldman also estimates there will be US$54 billion (S$76 billion) of investment flows from China into Hong Kong this year, while Chinese banks and property stocks are seen extending gains, with Goldman lifting them to overweight and market-weight respectively.

The firm is not so keen on defensive shares, including telecommunications, consumer staples and utilities, which were shifted to underweight. Goldman listed risks to their outlook that include a potentially more hawkish People's Bank of China - a possibility flagged by other investors as well.

The United States Federal Reserve's tightening cycle may also weigh on the yuan's exchange rate with the dollar, as could the continuing overhang of a trade conflict between the US and China.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on March 14, 2017, with the headline 'Goldman joins China-equity bull party after missing rally'. Print Edition | Subscribe