Goldman Sachs: China's stock market still has room to rebound, and the key depends on the increase in earnings and dividend buybacks

CBN

2024-05-26 18:22Posted on the official account of Shanghai Yicai

In the past two days, after a sharp rebound, A-shares and Hong Kong stocks have fallen into a continuous correction, and the market has also turned to focus on the sustainability of the rebound.

Is the rebound sustainable? How do overseas institutions plan for this round of rebound, and how do they view the role of the new "National Nine Articles"? Which industries are expected to be more ahead? In this regard, Goldman Sachs Chief China Equity Strategist Liu Jinjin recently accepted an interview with the first financial reporter in Shanghai.

He said that empirical data from the past 20 years shows that after entering a technical bull market (i.e. a rise of more than 20%), there is a 60% probability that the market will continue to rise, with a maximum average return of 35% over the next 6 months. However, as the market evolves, the driver of returns tends to shift from market capitalization expansion to earnings improvement, so profit realization is critical to sustaining a bull market. In addition, whether the dividend rate and repurchase under the new "National Nine Articles" can be increased is also the key, and overseas investors are most concerned about investment returns. At present, the dividend ratio of CSI 300 is about 33%, which is still significantly lower than that of the mainstream market (the median of the Japanese stock market in the past ten years is 50%, and the European stock market is 60%), and there is a lot of room for improvement.

Goldman Sachs: China's stock market still has room to rebound, and the key depends on the increase in earnings and dividend buybacks

Earnings improvement determines the sustainability of the rebound

There are two main factors that determine capital markets – valuation expansion and earnings improvement. The first leg has been taken – as of last week, the MSCI China Index has risen 31% since its lows in late January and 19% over the past month, outperforming most developed and emerging market equities. In the process, the index price-to-earnings ratio rose from 7.9x to 10.5x.

"In the past 20 years, every time the market has rebounded by more than 20%, there is a probability of about 60% that the rebound will continue thereafter, but generally the subsequent rebound will change from purely valuation-driven to earnings growth, so we also think that earnings growth will be a very important topic after that, which is the driving force for the subsequent returns of the Chinese stock market." Liu Jinjin said.

It is worth mentioning that the reason why Hong Kong stocks rebounded more than A-shares is because the MSCI China Index is regarded as a consumer index (Internet + consumption accounts for 55%, real estate accounts for less than 5%), which is very different from the Chinese mainland economy, and Goldman Sachs indicators also show that in the past period, Internet and consumer technology companies are the only major industries that have received earnings upgrades, which explains why some leading Internet companies have led the rebound in Hong Kong stocks. There are also investment bank data showing that in the past 18 months, MSCI China Internet EPS (earnings per share) increased by 23% and consumer EPS increased by 2% in the past 18 months.

Liu Jinjin said that the proportion of enterprises with profits exceeding expectations in the first quarter was about 54%, and the market's forecast for the profitability of the entire listed companies began to rise.

Real estate is a key variable. On May 17, following the central bank's announcement of the "big red envelope" of three policies, such as reducing the down payment, canceling the lower limit of the interest rate, and reducing the interest rate of the provident fund loan, many places accelerated the follow-up implementation, real estate stocks rebounded significantly, and the market implied risk (for real estate) measured by Goldman Sachs fell significantly.

"This year is expected to have about 1 trillion yuan of funds in place, although the market believes that the amount of funds may still be insufficient, if you want to fully digest the country's real estate inventory, or return to the level before 2018 or 2017, it is expected to take about 6 trillion ~ 7 trillion yuan, but this is not digested within a year, this year after about 1 trillion yuan of funds landed, it is expected that there will still be measures in the next few years, which will improve the confidence of the overall market." Liu Jinjin said.

Goldman Sachs has previously raised its 12-month target for the MSCI China Index to 70 from 60 and the CSI 300 from 3,900 to 4,100, with the agency maintaining an overweight (11% 12-month return) and a standard allocation to offshore China equities. In terms of sectors, it continued to overweight TMT, upgrading property developers and banks from underweight to standard, but downgrading capital goods and automobiles.

Increasing dividend buybacks will attract more foreign capital to return

Despite the recent return of northbound funds to A-shares and the addition of overseas hedge funds to Hong Kong stocks, the current allocation of international funds to China's stock market is still at a historically low level.

Goldman Sachs data shows that after the recent increase in positions, overseas hedge funds' holdings in China's stock market are still only 7.5%, which is in the historical 10th percentile (meaning that only 10% is less than this), while the allocation of global mutual funds to China's stock market has not rebounded significantly, with only 5.2%, in the historical 1st percentile. This also shows that if the follow-up sentiment further improves, there is more room for foreign capital to increase.

In the future, the implementation of the new "National Nine Measures" will also be crucial for foreign institutions that are concerned about investment returns. The new "National Nine Articles" will improve the quality of listed companies as an important guide, increase the intensity of delisting, encourage dividends, and the exchange will implement risk warnings for companies that have the ability to pay dividends but have small dividends.

"We feel that there is still a lot of room for the increase in the dividend rate of Chinese stocks." Liu Jinjin said that the current dividend rate of A-shares and Hong Kong stocks is only about 30%, which is at a low level in the world, compared with the United States and European stock markets of 50% and 60% respectively, and there is a lot of room for improvement. Goldman Sachs has also recently screened out 40 more bullish Chinese stocks in its preferred industries, including many companies with large dividends and buybacks.

Goldman Sachs believes that, following the experience of Japan and South Korea, corporate governance reforms that focus on improving valuation and shareholder returns may be conducive to attracting foreign investment. Among them, the improvement of key performance indicators, transparent incentives and clear investor communication are the key for investors to evaluate listed companies. With the implementation of the relevant policies of the new "National Nine Measures", which will be reflected in the market, it will increase the value or valuation premium of China's high-quality companies in the future. According to Goldman Sachs' calculations on listed companies' dividends, share buybacks, corporate governance, and the participation of institutional and long-term investors, if the A-share market continues to align with international mature markets in these four aspects, the valuation will have an upside potential of about 20% to 40% under the policy drive.

Liu Jinjin said that given that the market is still at a low level, not only the foreign capital has a low position in China's stock market, but also the proportion of cash held by China's domestic public funds is also high. If the overall return of China's stock market improves in the future, there will be more foreign capital return. "Many stock markets around the world have hit new highs this year, and the increase in A-shares does not necessarily require capital outflow from overseas markets, and a key factor still depends on whether the market's investment returns can be improved."

(This article is from Yicai)

View original image 250K