Goldman Sachs: China Stock Strategy Call Overflows, Short-Term Rebound Opportunity
On September 26th, Goldman Sachs released its latest China equity strategy report, stating that recent stimulus policies indicate that policymakers are focusing on economic growth and capital markets. Although the current measures may not be sufficient to fundamentally reverse the situation, the present is a good opportunity for a short-term rebound. Currently, Hong Kong stocks are still more favored than A-shares, and a more positive attitude towards A-shares may be adopted after the real estate market begins to show signs of improvement.
Since the low point in September, the Shanghai Composite Index has rebounded by nearly 11%, and the Hang Seng Index in Hong Kong has rebounded by as much as about 17%. Liu Jingjin, Goldman Sachs' China equity strategist, mentioned in the report that the package of measures may not reach the "bazooka" strong measures that some investors hope for, but it should help to suppress the high policy risk premium, and the valuation of stocks at the bottom of the cycle, as well as investors' positions on Chinese stocks at a ten-year low, both reflect this.
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"We believe that the current situation is a good opportunity for a short-term rebound, and the market background is similar to that in early April this year. The extent of the recovery will depend on multiple factors, especially domestic policies and earnings performance, as well as the results of the U.S. presidential election, but we recommend participating in China's market investment until the index valuation is revalued upwards to close to our target of 10.3 times the fair price-to-earnings ratio (implied upside of 11%) or the rebound exceeds the last short-term high in April/May (implied upside of 14%)." The report pointed out.
Goldman Sachs said that in terms of the market, Hong Kong stocks are still more favored than A-shares, because the latter's earnings forecast revision trend is relatively stronger, the valuation is more attractive from both an absolute value and a discount relative to A-shares, the southbound capital flow brings more supportive liquidity, and it may be more sensitive to the Federal Reserve's policy impulses during the U.S. interest rate reduction cycle. "If there are signs of stabilization in the real estate market or further strengthening of policy momentum, then we may adopt a more positive attitude towards A-shares."
According to the reporter of the First Financial Daily, on September 24th, the same day as the joint press conference was held and a series of stimulus policies were announced, Goldman Sachs held a telephone strategy meeting for global customers in the afternoon, focusing on analyzing the impact of China's stimulus policies on the macro economy, real estate, consumption, and stock markets. An institutional person who participated in the meeting told the reporter that the strategy meeting was rarely crowded, exceeding the 500-person limit of the Zoom meeting, causing many customers to be unable to dial in. It can be seen that overseas investors are particularly concerned about China's policy prospects.
On the 24th, the reporter learned from the main brokerage business person of overseas investment banks that in the morning, overseas hedge fund funds had already flowed into the Chinese stock market, mainly buying large consumer goods, and after noon, they surged into the white wine and high dividend sectors. Until the 26th, growth stocks also began to receive attention.
The main reason that ignited the market was the central bank's announcement of the creation of two structural monetary policy tools, with a total scale of 800 billion yuan in the first phase (setting up a swap facility of no more than 500 billion yuan, allowing qualified financial institutions to obtain additional liquidity to invest in the stock market; setting up a 300 billion yuan re-lending mechanism for listed companies and major shareholders to repurchase stocks, with an interest rate of 2.25%). From the beginning of the year to now, it is roughly estimated that the total purchase of the national team may reach 90 billion US dollars. The first phase of 800 billion yuan (about 113 billion US dollars) is about 1.3 times this figure. In addition, the press conference also mentioned the study of setting up a market stabilization fund.
On the afternoon of the 26th, the Central Political Bureau meeting proposed to "promote the real estate market to stop falling and stabilize", and institutional persons believe that this is the first time in many years that the Political Bureau meeting has clearly proposed policy requirements related to the operation of the real estate market, further stimulating the market to rise, and the Shanghai Composite Index broke through the 3000-point mark in one fell swoop, with a daily increase of 3.61%.
Two specific measures proposed by the meeting are worth noting. First, the meeting clearly requires "adjusting housing purchase restrictions", and second, the meeting emphasizes "increasing the loan allocation for 'white list' projects", with the intention of promoting commercial banks to expand the credit scale of real estate companies. Up to now, commercial banks have approved more than 5,700 "white list" projects, with approved financing amounts reaching 1.43 trillion yuan, supporting more than 4 million houses to be delivered on schedule.
Goldman Sachs said that before the real estate market's problems are resolved, Chinese stocks may still be "short-term trading targets". The institution mentioned that although the adjustment and improvement of the housing inventory reduction plan may moderately improve the financing conditions of some local governments when purchasing land reserves and vacant residential buildings, so far, the overall strength of national support and capital deployment seems to be lacking. Goldman Sachs estimates that the value of the excess inventory nationwide may be as high as 8 trillion yuan. The catalyst for the long-term recovery of the capital market lies in the market's confidence in the scale (i.e., fiscal stimulus through re-lending or PSL plans) and effectiveness of real estate relief policies, or seeing signs that the current cycle is nearing an end.Goldman Sachs believes that the "shareholder return theme" remains one of the most ideal investment themes for seeking tactical excess returns from the Chinese stock market. As early as June of this year, Goldman Sachs constructed the aforementioned portfolio, selecting 40 stocks from 16 industry groups, with state-owned enterprises accounting for 65%.
The aforementioned portfolio includes three specific groups of companies. The first is stable cash cows (such as Kweichow Moutai, Yangtze Power, Midea, Industrial and Commercial Bank of China, etc.), that is, stocks with excellent past performance, which provide shareholders with high and stable cash returns. The second is companies with high dividends and high buyback potential (such as Tencent, CATL, JD.com, Hengrui Medicine, BYD, State Grid South Rui, etc.), that is, companies with strong fundamentals (high expected revenue and profit growth, positive free cash flow) but relatively conservative in dividend and buyback policies, in order to find potential upside in shareholder returns.
The third category is a selection of central and local state-owned enterprises (such as Fenjiu, Shanghai Airport, Changan Automobile, Weichai Power, etc.), listed state-owned enterprises are more motivated to return excess cash to shareholders, and will focus on state-owned enterprises with good financial conditions (low net debt-to-equity ratio, positive free cash flow) and financial incentives (such as the implementation of management incentive plans) to seek upside potential in shareholder returns.
In the past 3 years (as of the second quarter of this year), the portfolio has achieved a total return of 11%, outperforming the MSCI China Index and the CSI 300 Index by 49 basis points and 38 basis points, respectively.