Is China's stock market rally sustainable? Goldman Sachs and HSBC said the same thing: history says don't leave!

Wall Street Sights

2024-05-21 11:57Posted on the official account of Shanghai Wall Street

After the big rally, it's still too early to talk about leaving.

In recent months, China's stock market has risen sharply, with the A-share Shanghai Index rebounding more than 17% from its low point in early February, and the Hong Kong Hang Seng Index steadily entering a technical bull market (i.e., rising more than 20%), achieving a comprehensive "big counteroffensive".

The next question for investors is: should you sell while the price is high or keep holding?

Goldman Sachs and HSBC respectively released their latest research reports on May 20, saying that from the perspective of historical data, this round of rebound is still in the middle stage, and the stock market still has room to rise.

History has shown that the rally is not over yet

Judging from historical data, the rally in the Chinese market may not be over yet.

Goldman Sachs said that data from the past 20 years shows that after entering a technical bull market, the market is 60% likely to continue to rise, and the maximum return over the next six months can reach an average of 35%.

HSBC pointed out that since 2000, the Hang Seng China Enterprises Index has rebounded by more than 30% in an average of 12 times in five months, and after each rebound, the index has continued to rally for another four months, with an average return of 27%.

This means that every big rally in the Hang Seng China Enterprises Index since 2000 has lasted for nine months, with an average return of 40-50%.

So what's next to continue to support the stock market rally? HSBC considers the following factors:

1) The overall valuation of China's stock market is still below the average of 5 years ago, and cheap valuations will bring corresponding support.

2) The scale of corporate stock repurchases may increase, and there is still room for "interest rate cuts and RRR cuts" during the year.

3) As much as a quarter of the buying orders in the Hong Kong stock market come from southbound funds, and there is still a lot of room for foreign investors to buy.

4) Supportive policies continue to exert force.

Goldman Sachs concluded in the report that the outlook for the Chinese market remains positive, amid the triple tailwinds of policy support, attractive valuations and earnings potential.

The next key driver: profitability

Goldman Sachs pointed out that as the rally continues, the key driver of the rally will shift from valuation expansion to earnings correction, which indicates that earnings performance will have a significant impact on the sustainability of the bull market.

Our study of 23 cases shows that valuation expansion was the main driver behind the initial 20% increase, but after reaching the 20% tipping point, the continuation of the rally was partly dependent on consensus earnings corrections, which increased by an average of 10% in seven cases, and peaked by another 35% rally over the next 6 months.

HSBC pointed out that in the short term, any positive earnings news at the moment will bring some support to the stock market.

In the longer term, there is a real risk of a downward revision of consensus earnings estimates, but it may not be revealed until the fourth quarter of 2024, and there is still a lot of support for equities until then.

In 2023, the EPS growth rate of Chinese companies was 7%, dragged down by the real estate and commodities sectors, but if the impact of these two sectors is excluded, the overall EPS of other sectors increased by 15%.

While the overall earnings performance in the first quarter was lower than expected, leading to a downward revision of the full-year earnings forecast, the full-year earnings outlook is largely dependent on the fourth-quarter earnings.

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