China's stock market ushered in 2022 with a correction, combined with the downward pressure on the economy in the first quarter, which made investors more worried about the subsequent market trend.
Over the past few weeks, Goldman Sachs' team of equity strategists has engaged extensively with clients to discuss the outlook for China's stock market in 2022. At the beginning of the new year, Goldman Sachs released the main issues on the Chinese stock market, recent market trends and the latest views, reiterating the bullish view of the Chinese stock market. As early as last November, Goldman Sachs released a report mentioning that China's offshore stock market was once again upgraded from standard (equal weight, july to standard) to overweight, and the judgment that A shares maintained overweight, it is expected that the MSCI China and CSI 300 indexes will have 30% and 13% returns.
China's stock market is still worth investing in
Excluding the ADR market, domestic A-shares account for nearly 80% of the total market capitalization of the remaining Chinese companies' shares, while the foreign shareholding ratio of A-shares is only 4.5%. Goldman Sachs believes that the opening up of the Chinese market and the strong momentum of reform may make the A-share market more valuable and accessible to international investors.
In 2021, the net inflow of northbound funds exceeded 400 billion yuan, a record high, and Goldman Sachs believes that northbound capital inflows and global mutual fund high allocation of A shares reflect the attractiveness of the Chinese market to some extent.
Slowing GDP growth does not mean low returns in the stock market
In 2021, China's annual GDP growth rate recorded a high growth rate of 8.1%, but all walks of life believe that there is greater downward pressure on China's economic growth rate in the first quarter of 2022.
In the fourth quarter of last year, China's GDP growth has slowed to 4%, especially consumption has slowed more than expected, and the Opmy Kerong virus is the biggest risk to China. However, Goldman Sachs believes that from historical experience, the correlation between the GDP growth deceleration and stock returns is low.
With the slowdown in earnings growth, the stock market can still achieve good performance
In the first quarter, corporate earnings fell, the value center of the stock market moved down, and most institutions believed that A shares should be "broken" first and then "established".
But Goldman Sachs believes that if earnings growth is low, the stock market can still perform well, especially after the stock market has experienced a sharp correction, and when the stock market cycle has entered the "hope" phase and the expansion of the price-earnings ratio has pushed the stock market up strongly.
In fact, Goldman Sachs expects MSCI China's earnings per share (EPS) to grow by 7 percent in 2022, below the prevailing expectation of 13 percent, for the following reasons, goldman Sachs economists' expectations for GDP growth in 2022 (4.8 percent) are lower than general expectations (more than 5 percent); growth is weighed down by a slowdown in the real estate market, which accounts for about 15 percent of total market earnings;PP I, CPI scissors are larger, at least in the first half of the year, which could put pressure on the profit margins of some downstream industries. However, Goldman Sachs also sees some technical and cyclical supporting factors that may offset the pressure of a slowdown in profit growth.
Support factors include the fact that the MSCI China Index tends to have good subsequent trading returns after hitting the bottom of each major correction (up 30% on average in 12 months); if you exclude 2016 (the MSCI China Index still fell 1.6% after a 10% correction in 2015), the MSCI China Index has not experienced negative annual returns for two consecutive years since 2002; the cycle of the Chinese stock market may be transitioning from "despair" to "hope" at this stage, Valuation expansion usually overshadows weak fundamentals and pushes the stock market up strongly.
Multiple factors can drive valuation revaluations
While the profitability of one leg of A shares slows down, the valuation expansion of the other leg will become the main force driving the index to climb.
In Goldman Sachs' view, a range of factors could drive valuation revaluations, including policy easing, current political events and regulatory adjustments. "China is likely to be one of the few countries in the world to adopt accommodative policies in 2022, thus helping to compress the higher risk premium implied by valuations."
On January 17, China's MLF (Medium-term Lending Facility) unexpectedly cut 10 basis points (BP). Most institutions expect China to offer further easing until the Fed officially raises interest rates in March.
The stage of major adjustment of industry regulatory policies has passed
The adjustment of industry regulatory policies is one of the key factors in the sharp fluctuations in the market in 2021. Goldman Sachs believes that from the perspective of intensity, the major adjustment stage of industry regulatory policies has passed.
"Judging by our indicators, market prices have reflected the consideration of changes in policy adjustments. Policy clarity in areas such as VIE structure and overseas listing has also been significantly improved. The agency said.
Wang Yajun, co-head of goldman Sachs Asia (except Japan), said in an interview with the first financial reporter a few days ago, "The return of Chinese stocks in 2022 will continue to be active, but the general direction of mutual opening and integration of The Chinese and US capital markets will not change, and it is expected that the regulatory authorities of China and the United States can reach a solution to the differences in technical issues such as audit papers." ”
Valuations in China's stock market are attractive
In terms of valuation, compared with the global market, Goldman Sachs believes that the index valuation of the Chinese stock market (12 times) is at a low level in recent years, and there is a significant discount relative to global stocks.
Goldman Sachs said the MSCI China Index and the CSI 300 Index currently have 11.6 times and 14.3 times forward price-to-earnings ratios of 11.6 times and 14.3 times respectively, and valuations are in the 5% and 67% quantiles respectively relative to their respective historical levels over the past 5 years. In contrast, valuations peaked at 18.6 times and 17.1 times, respectively, when the market peaked 11 months ago. MSCI China's share price is also significantly discounted compared to global stocks (33% lower than MSCI ACWI), of which the offshore Chinese technology (Internet) share price is 27% lower than that of US technology stocks, the largest gap in recent years.
The agency said the expected rate of return is generally higher at current P/E levels. According to Goldman Sachs' top-down macro valuation model, the MSCI China Index should be valued at 14.5 times, implying a valuation gain of 25%. China's Internet current price-earnings ratio is 21.8 times, close to the trough of the 5-year range.
Housing-related credit is less likely to drag down overall market performance
The downside risk of the real estate market is always a sword hanging over the market, and all walks of life are still worried that the real estate problem will drag down the overall performance of the stock market.
But Goldman Sachs thinks that's unlikely. "While liquidity problems with some highly leveraged developers are likely to persist, negative spillovers to the broader economy and financial markets should be largely under control."
At the same time, the agency believes that the reallocation of assets from the real estate market ($60 trillion) to the stock market (A-share size of $13 trillion) may accelerate in 2022. "We estimate that Chinese residents will hold 11 trillion yuan of net investable funds in 2022, of which 3 trillion yuan may be allocated to the stock market."
The COVID-19 clearance policy will not be relaxed for the time being
At least until the end of 2022, Goldman Sachs believes that China's policy of "dynamic zeroing" will not be relaxed.
Goldman Sachs said this means a bumpy road to recovery for consumer goods stocks, but there are trading opportunities in other sectors, with industries such as pharmaceuticals, food and retail, durable goods, communications equipment and logistics likely to usher in more investment opportunities.
At the same time, it is optimistic about A shares and H shares
Goldman Sachs is bullish on both A-shares and H-shares, as these two markets represent different opportunities for global investors.
In the case of A-shares, Goldman Sachs believes that the market is a large, liquid, growing asset class with insufficient allocation by international investors, with abundant opportunities for excess returns. "We believe that A-shares are a strategic investment asset class that should not be ignored for global equity investors."
H-shares offer attractive tactical upside opportunities. "The Internet sector accounts for 40% of the MSCI China Index, and the fundamental front picture remains uncertain, but the overall valuation is low and the position is very light, and if our expectations of policy easing and a slowdown in the regulatory cycle come true, the risk-reward ratio will be compelling." The agency said.
Balanced layout of "backward stocks" and "leading stocks"
In terms of specific sectors, is it to buy "backward stocks" (Internet) or "leading stocks" (policy benefit stocks)?
Statistically speaking, Goldman Sachs believes that the probability of these two types of stocks reversing in 2022 is 50%, and the more important alpha generating factor in 2022 is growth. Goldman Sachs is bullish on the prospect of a recovery in valuations for internet retail and media, which last year's regulation led to a 40 percent cut in their earnings. The agency has also added to the localization of automotive, consumer durables (such as sportswear) and semiconductors as they benefit from a trend toward social equity.
"We will avoid real estate-related investments, especially real estate (state-owned developers are more favored than private developers), materials (especially steel and cement) and banks, where profitability is likely to come under pressure as the property market slows and interest rates may fall." The agency said.
Goldman Sachs reiterated its continued focus on the "common prosperity" portfolio and released a list of relevant basket stocks, including 50 A and H shares such as Xiaomi, LONGi shares, China Exemption, Luxshare Precision, Li Ning, Gree, Sungrow, Hengrui Pharmaceutical, Ctrip, Anta, and Makihara shares.