The Year of the Dragon is about to open, how do foreign investors view A-shares?

Foreign investment banks believe that the continuous force of fiscal policy will support economic growth, in this context, corporate earnings are expected to recover, and the upward repair of stock market valuation is worth looking forward to

Text: Zhang Xinpei, intern, Tan Jialin

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The start of 2024 is full of ups and downs in A-shares, and the market's expectations for the future trend of A-shares are full of caution. How do major foreign investment banks with different perspectives view A-shares?

Most foreign investors believe that China's economy will continue to recover in the new year and play an important role in promoting the world economy, and at the same time, they look forward to the continued fiscal policy in the new year to support economic growth. Against this backdrop, corporate earnings are expected to recover, and the upward recovery of stock market valuations is worth looking forward to.

In terms of specific sectors, UBS strategy analyst Wang Zonghao believes that in 2024, the A-share financial sector will maintain steady earnings growth under the improvement of capital market sentiment, while the non-financial sector is also expected to rebound sharply in earnings growth under the dual impetus of favorable policies and macro recovery. "The worst may be behind us, and it's time to turn to optimism. ”

Policy efforts are expected to be strengthened

The A-share market in 2023 is not optimistic, and the sluggish performance will continue until early 2024. Major foreign banks believe that in the new year, it is necessary to drive the macro economy through the continuous force of fiscal policy, expand aggregate demand, boost investor expectations, and lead the market valuation to repair upward.

In the current context of low inflation, there is still room for policy force. Ma Lei, chief investment officer of Invesco Group, believes that the additional 1 trillion yuan of special treasury bonds issued last year has increased the fiscal deficit from 3% to 3.8% of GDP, a historic increase, and it is expected that in the new year, the government will still focus on improving China's economy and financial market and enhance positive market sentiment. Martin Dropkin, head of equities at Fidelity Group Asia Pacific, also expects that macroeconomic control in 2024 will exert efforts in fiscal and monetary policies to ensure that economic growth is on track. In terms of specific directions, Song Yu, chief China economist at BlackRock, believes that the current inflation level is low, real interest rates are high, and the policy may be carried out in the direction of lowering interest rates, while there is also room for further incentives for automobiles and real estate.

Under the premise of policy support, Fidelity Group believes that China's economic growth will reach 4% to 5% in 2024. Goldman Sachs Group Inc. is also optimistic, expecting real GDP growth of 4.8%. BlackRock Song Yu added that the core growth point of the future economy lies in the improvement of high-end technology, low-carbon and mass consumption, and the silver economy, as well as service industries including personal health care and personal medical care, may also have greater development.

There are also foreign investors who are cautious and conservative about the macro economy next year. Xing Ziqiang, chief China economist at Morgan Stanley, expects China's real GDP to grow by just over 4% in 2024. This forecast is significantly lower than market expectations, and the decisive factor is also the strength of policy. It added that China is currently facing greater deflationary pressures, affecting corporate earnings and asset valuations in the market, but the current policy underestimates the urgency of solving the deflationary problem, and more vigorous adjustments are needed.

Optimistic about the recovery of corporate earnings

At present, China's capital market is at a low valuation, and corporate earnings will rebound in the new year, which is the consensus of many foreign investors on A-shares.

Goldman Sachs Chief China Equity Strategist Liu Jinjin expects earnings growth of 10% and 11% respectively in 2024 for the MSCI China Index and CSI 300 Index, which is the result of a combination of factors: valuations are generally under pressure, and the positive policy response will push the return distribution to the right in 2024, while property sales are expected to decline better in 2024 than last year, and the drag on earnings will also be weakened.

Lu Wenjie, chief investment officer of BlackRock Fund, also believes that under the support of policies, China's economy will recover moderately, and excellent corporate earnings are expected to be repaired.

Wang Zonghao, a strategic analyst at UBS, believes that the current static price-earnings ratio of the CSI 300 index is close to the lows of 2016, 2018 and 2022. However, given that major economic indicators have shown signs of bottoming out and macro easing continues to increase, this low valuation level is not reasonable. Looking ahead to 2024, the MSCI China Index may have an upside of around 15% and earnings growth of 10%. At the same time, the recovery of revenue growth and the improvement of profit margins in downstream industries are expected to drive the earnings per share growth rate of the A-share CSI 300 Index, which is expected to increase by 8% year-on-year in 2024.

Wang Zonghao added that there are three key catalysts for the upward recovery of earnings: first, China's consumption and service industries may continue to recover in the post-epidemic era in 2024 with the help of the small release of excess savings; second, the current national fiscal thinking is to stabilize growth through more explicit fiscal support, which is expected to improve investors' expectations for the economy and policies, so as to repair valuations; third, the return trend of northbound funds, although the proportion of northbound funds in A-share holdings and trading volume is not high, but high-frequency disclosure will have a greater impact on the expectations of domestic investors。 At the same time, once overseas "smart money" starts to net inflow, the risk appetite of onshore investors will also be enhanced, thus forming a positive feedback loop and continuously benefiting the A-share market.

Which industries are worth looking forward to

In specific areas, J.P. Morgan Asset Management strategists believe that sustained earnings growth in 2024 is expected despite the current P/E ratios of communication services, consumer discretionary companies, and many leading technology companies are below the 2015 average.

Goldman Sachs Liu Jinjin added that mass-market consumer stocks, some export companies, artificial intelligence, new infrastructure, "little giants" (small enterprises with good performance, development potential and cultivation value in the early stage of growth, specialized and new small enterprises), and leading companies in corporate governance will also perform well with China's economic rebalancing, which deserves investment attention.

With the recovery of consumption after the epidemic, many foreign investors believe that the change in consumer behavior will bring opportunities to A-shares, and are optimistic about the development of consumer stocks.

In the June 2023 Survey of China's Lower-tier Market Expansion Consumers, UBS Evidence Lab found that residents in lower-tier cities have a strong tendency to upgrade their consumption, indicating that a significant part of this group has withstood the economic impact of the epidemic and that consumption recovery has begun. Martin Dropkin of Fidelity Group also believes that it is the large excess savings accumulated during the pandemic that have strengthened household spending, and this trend will be good for the performance of consumer stocks. Invesco added that middle-class consumption is on the rise, and shifts in consumer behaviour will also provide excellent investment opportunities over the next five to 10 years, particularly in the renewable energy, electric vehicle and battery sectors.

Goldman Sachs Liu Jinjin added that the earnings growth of the Internet sector is also expected to improve, and at the same time, thanks to further cost optimization and improved liquidity, the earnings of TMT (technology, media, communications) companies will increase by another 13% on the basis of 2023, in addition, the technology hardware industry is also expected to reverse the downward trend in 2024, supported by global inventory replenishment and unique product cycles.