Market Insight | Goldman Sachs: Institutions Await Policy Window; Foreign Investors Still Have Room to Increase Allocation to China (AI Translation)

【市场洞察】高盛：机构等待政策窗口期 外资配置中国仍有空间

Entering the summer season, market trading sentiment in China remains subdued, with many institutions adopting a wait-and-see attitude ahead of July–August tariff negotiations and the Politburo meeting. Goldman Sachs’ China equity strategist, Fu Si, maintains an “overweight” recommendation on both China A-shares and overseas China concepts stocks, anticipating a possible rebound in the latter half of the year. Currently, the MSCI China Index (MXCN) trades at an 11.7x P/E ratio, largely in line with previous Goldman predictions. For 2024, corporate earnings growth for the MSCI China companies is projected at 9%, rising to 10% for 2025—the main driver of share price upside.[para. 1]

Two key variables will influence market expectations: tariff levels and domestic fiscal stimulus. Goldman’s baseline scenario assumes tariffs remain at about 40%. Should tariffs fall to 20%, earnings growth could reach 16% and the valuation multiple might climb to 13x; conversely, higher tariffs would more significantly drag on earnings and valuations. However, strong fiscal policy responses could mitigate these negative impacts.[para. 2]

Despite downward revisions to FY2024 earning forecasts in April and May, temporary relief in tariff tensions has seen Goldman revert to previous 9% growth expectations for Chinese corporates, suggesting firms and policymakers can absorb current tariff rates. If tariffs hold steady, Goldman forecasts the MSCI China Index could rise to 84 over the next 12 months, and the CSI 300 Index from roughly 3900 current points up to 4600, implying over 10% upside. Goldman’s profit growth outlook is more robust than other foreign firms, attributed to the positive long-term impact of AI (adding 1–2 ppt of annual earnings growth), effective fiscal offsets to tariff shocks, and modest recovery from last year’s inflationary pressures.[para. 3]

A major highlight is the optimistic outlook for China’s leading private companies, underpinned by looser regulatory measures and improving returns and ROE since 2022. The investment appeal of top private sector firms ("China’s Top Ten Private Enterprises")—including Tencent, Alibaba, Xiaomi, BYD, Meituan, NetEase, Midea, Hengrui Medicine, Trip.com, and Anta Sports—stems from both growth opportunities and their relatively low market concentration (at 17% for the top ten vs. 30% for the US). Strong R&D and capex further reinforce performance advantages for market leaders.[para. 4][para. 5][para. 6]

Regarding global investors, allocation to Chinese stocks remains below historical averages. Although there was a notable increase in global fund exposure to China after September 2023 and the release of key AI innovations in February 2024, concerns over April’s tariff escalation led to divergent allocation strategies. Hedge funds sharply reduced their China holdings by mid-June, but stand ready to re-enter on attractive valuations, while active funds maintain a long-term view. In early 2024, China’s share of global investment portfolios dipped to 7%, near a ten-year low, but appears poised for gradual recovery as allocations to US equities retreat. Investors, however, remain cautious, awaiting more clarity from upcoming July–August policy events and tariff negotiations.[para. 7][para. 8][para. 9][para. 10]

The Hong Kong market has seen robust southbound fund inflows, nearly $90 billion year-to-date or 90% of last year’s total. High-dividend sectors attract close to 30% of these flows, while tech (notably AI) and consumer stocks are also favored. Despite a hot IPO market in Hong Kong, the impact on liquidity is subdued as IPOs represent a small market share and price discounts are narrow. A-shares and H-shares are both expected to perform solidly in coming months, each with distinct sector advantages.[para. 11][para. 12][para. 13]

Looking ahead to the rest of the year, Fu Si favors AI, high-dividend, and emerging market export themes, with Goldman remaining overweight on consumer sectors and those benefiting from government spending (e.g., healthcare, banks, and real estate). The consumer sector’s strong fundamentals are positive, but valuations are high and the market crowded, making selectivity crucial. The healthcare, particularly innovative pharmaceuticals, is attractive due to supportive fundamentals and policy stability.[para. 14][para. 15]