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Is a China stock rally sustainable? Goldman Sachs weighs in

Published 05/21/2024, 01:03 AM
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Investing.com-- Chinese stock markets saw a stellar rebound over the past two months, with Goldman Sachs analysts forecasting more gains to come, especially if some key conditions were met.

China’s blue-chip Shanghai Shenzhen CSI 300 index and the broader Shanghai Composite index were both trading between 16% to 18% higher from multi-year lows hit in late-January. Their rebound was driven by  a mix of bargain hunting, optimism over more stimulus measures from Beijing, and some signs of improvement in the world’s second-largest economy.

Goldman Sachs analysts said they remained Overweight on China’s A shares index (CSI 300), and hiked their 12-month target for the index to 4,100 points from 3,900 points- implying an upside of about 11% from current levels. 

Goldman Sachs analysts said that Chinese markets had the potential to rally further, with historical evidence suggesting a greater chance of gains in the event of a bull market- ie a 20% gain from recent lows. But Chinese companies will have to deliver on the earnings front for such a scenario to play out.

Further gains in Chinese markets will also be contingent on how well Beijing delivers its newly announced stimulus measures, and just how U.S.-China trade tensions will persist in the coming months, analysts said. 

On a sectoral basis, Goldman Sachs analysts said they were overweight on technology, media and telecommunications, were marketweight on developers and banks, and had downgraded their outlook on automobiles and capital goods. 

But analysts said that risks to the China rally were still in play, and that policy disappointment and Sino-U.S. ructions were the biggest points of uncertainty. 

China’s beleaguered property sector was also a point of risk, and will require steady government support to spark a recovery. While Beijing recently announced its most drastic loosening of property market restrictions, as well as direct government support for the sector, markets still sought more cues on how the measures will be carried out.

A key point of uncertainty was reports suggesting that Beijing was instructing state governments to begin buying some houses to help reduce inventory for major developers.

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