Northbound funds have net purchases of more than $190 billion this year, and Goldman Sachs said it is now the time to increase the tactical position in China's stock market

Before the Dragon Boat Festival, the Shanghai Composite Index fell for three consecutive days to lose 3,200 points, and northbound funds also showed a wait-and-see attitude, with a slight net outflow of 641 million yuan in three trading days.

However, from the overall situation so far this year, as of June 21, the total net purchase amount of northbound funds has reached 191.806 billion yuan, while the net purchase of northbound funds in 2022 is only 90 billion yuan.

In fact, from the recent views released by a number of foreign institutions, after the previous correction, foreign institutions believe that the prospects of China's stock market are still attractive, and the downside of the current level is quite limited. Goldman Sachs even judged that now may be an attractive tactical time to increase positions.

Macro growth momentum improved

Since 2023, the Fed's interest rate hikes have continued, liquidity has been shrinking, and the balance sheet has a tendency to deteriorate. In China, foreign investment has seen economic growth and recovery.

On June 21, the Office of the Investment Director of UBS Wealth Management said the government needed to introduce more short-term easing measures to restore confidence to support the recovery momentum. In terms of monetary policy, UBS believes that after cutting interest rates this month People's Bank of China it will cut the MLF rate twice (once each in the third and fourth quarters) for a total of 20 basis points; There will be 1-2 RRR cuts of 25-50 basis points each before the end of this year. This is roughly in line with the easing in 2022. At the same time, UBS believes that the government is more likely to exert fiscal efforts to stabilize growth by increasing infrastructure investment (using policy banking tools, accelerating the issuance of local bonds, etc.) and boosting consumption (providing targeted subsidies and supporting the development of the automotive industry).

Based on the baseline assumption that the U.S. economy might avoid recession, Goldman Sachs economists argued in a June 19 English-language report that the cyclical nature of China's growth should be supported in the second half of 2023, mainly due to a further narrowing of the service output gap, improved manufacturing inventory dynamics, and a weakening drag on GDP from the real estate market.

Goldman Sachs noted that Chinese companies' second-quarter earnings are expected to grow 23 percent and continue to revise earnings per share upwards after 12 consecutive months of downward revisions, "Even taking into account the potential impact of the uneven recovery and revised GDP growth, we are pleased with the assumption of 14% earnings growth in 2023 and believe that the realization of profits will remain a key driver of our 12-month rally expectations for Chinese equities by 7%. ”

"Our judgment on China's future investment prospects is that China is in a different economic cycle than mature economies overseas." Fidelity International pointed out that in the United States and other developed economies, inflation is still a thorny problem, while in China, inflation does not constitute an impact on economic growth at present, which provides more space for the implementation of domestic macro stimulus policies.

Fidelity International further said that a very important way to release spending power is the improvement of employment conditions, and some factors have been seen improving. If the employment situation can be effectively improved, then consumer sentiment is expected to increase, which may eventually be reflected in the corporate earnings of listed companies.

Now is the time for tactical scalping

Goldman Sachs pointed out in the research report that the five major upside catalysts affecting China's stock market this year are: continuous improvement of macro growth momentum, improvement in corporate interim performance earnings, policy easing, easing of geopolitical pressures, and potential factors that break negative investor confidence.

The agency said that at present, it seems that some of the above five factors are landing, combined with lower valuations, and the reduction of positions of fast money investors, the tactical trading window of the Chinese stock market is now open again. The downside at the current level is quite limited and now may be an attractive point for tactical additions.

UBS believes that the outlook for Chinese equities remains attractive against the backdrop of near-peak pessimism, valuations (about 9.2 times earnings) close to their October lows, and continued improvement in earnings growth ahead of the second quarter report.

"We maintain our forecast for mid-double-digit upside for Chinese equities by the end of the year, but at the same time we believe that adding more defensive asset classes can help stabilize investment performance in volatile market conditions." UBS noted.

In Goldman Sachs' view, market technical factors and investor positioning/sentiment will be the more dominant drivers of the short-term performance of the A-share market.

"The allocation of international investors continues to send mixed messages: China-specific funds, including emerging market and Asian funds where China accounts for more than 30% of the benchmark weighting, remain underweighted, but their nominal exposure to China is now above historical averages; Global mandates, which account for more than 70% of our total AUM in our fund tracking space, have been underweighted against China, in part due to China's insufficient neutral weight in index benchmarks; Hedge fund investors are much clearer in their positioning, with their net exposure to China more than halved from those accumulated during previous market booms (as a percentage of their total global equity risk), and they may shift to incremental buyers if the market sentiment cycle improves. Goldman Sachs analysis said.

Still bullish on consumption

Specific to the main line of investment, Goldman Sachs believes that there are three main ones.

The first are the beneficiaries of policy easing, including services/consumption, EV supply chains, new infrastructure, little giants, property-related cohorts and new manufacturing, which appear to be well positioned to receive potential policy support. The second is artificial intelligence (AI), which can focus on AI companies in hardware, semiconductors, and application areas. Finally, in terms of long-term exposure, pricing on China-specific themes such as SOE reform and Little Giants appears attractive relative to their re-ratings and growth prospects.

In terms of sectors, Goldman Sachs reiterated its overweight recommendations for consumer services, healthcare services, insurance, media and retail, reflecting its continued optimism about a services-led recovery.

Morgan Stanley said that the proportion of consumption and retail related to the industry allocation is relatively high. At the same time, the agency makes some selective allocations to the raw material industry, industrial industry, including the technology industry, which has options based on medium and long-term thematic investment, and short-term, such as infrastructure-related, or the expectation of bottoming out in industrial production.

Hanya remains optimistic about investment opportunities in China's high-end manufacturing sectors, including medical devices and semiconductors, which are in line with China's goal of achieving technological independence. In addition, the agency is also optimistic about new economic industries such as new energy, energy storage and information security.