China's stock market ushered in 2022 with a correction, superimposed with the downward pressure on the economy in the first quarter, which made investors more worried about the subsequent market trend.
In the past few weeks, Goldman Sachs Group's stock strategy analyst team has conducted extensive exchanges with customers to jointly discuss the prospect of China's stock market in 2022. At the beginning of the new year, Goldman Sachs released its main topics, recent market trends and latest views on China's stock market, reiterating its view of being bullish on China's stock market. As early as last November, the report released by Goldman Sachs mentioned that China's offshore stock market was upgraded from standard allocation (equal weight, reduced to standard allocation in July) to over weight again, and the judgment of A-Shares remained over allocation. It is expected that MSCI China and CSI 300 index will have a return of 30% and 13%.
China's stock market is still worth investing
Excluding ADR market, domestic A shares account for nearly 80% of the total market value of other Chinese companies, while the proportion of A-Shares held by foreign investors is only 4.5%. Goldman Sachs believes that the opening-up and strong reform momentum of China's market may make the A-share market more valuable and accessible to international investors.
In 2021, the net inflow of northbound funds exceeded 400 billion yuan, a record high. Goldman Sachs believes that the inflow of northbound funds and the high allocation of A-Shares of global mutual funds reflect the attraction of the Chinese market to a certain extent.
the slowdown of GDP growth does not mean that the stock market has a low return
In 2021, China's annual GDP growth recorded a high growth rate of 8.1%, but people from all walks of life believe that there is great downward pressure on China's economic growth in the first quarter of 2022.
In the fourth quarter of last year, China's GDP growth slowed to 4%, especially the consumption slowed down more than expected, and Omicron virus is the biggest risk facing China. However, Goldman Sachs believes that from historical experience, the correlation between the slowdown of GDP growth and stock returns is low.
under the slowdown of profit growth, the stock market can still achieve good performance
In the first quarter, corporate profits declined and the value center of the stock market moved down. Most institutions believe that A-Shares should be "broken" first and then "established".
However, Goldman Sachs believes that if the profit growth is low, the stock market can still achieve good performance, especially after the stock market has experienced a sharp correction, the stock market cycle has entered the "Hope" stage, and the expansion of P / E ratio has driven the stock market to rise strongly.
In fact, Goldman Sachs predicts that MSCI China's earnings per share (EPS) will increase by 7% in 2022, lower than the general expectation of 13%. The reasons are as follows: Goldman Sachs economists' expectation of GDP growth in 2022 (4.8%) is lower than the general expectation (more than 5%); The growth is dragged down by the slowdown of the real estate market, which accounts for about 15% of the total market revenue; The scissors difference between PPI and CPI is large, at least in the first half of the year, which may put pressure on the profit margin of some downstream industries. However, Goldman Sachs also sees some technical and cyclical support factors that may offset the pressure of slowing profit growth.
Supporting factors include that after each major correction hit the bottom, the MSCI China Index often has a good return on subsequent transactions (an average increase of 30% in 12 months); If 2016 is excluded (MSCI China index still fell by 1.6% after a 10% correction in 2015), MSCI China Index has never experienced negative annual returns for two consecutive years since 2002; The cycle of China's stock market may be transitioning from "despair" to "Hope". At this stage, valuation expansion usually overshadows weak fundamentals and drives the stock market to rise strongly.
multiple factors can promote valuation revaluation
While the earnings of one leg of A-Shares are slowing down, the valuation expansion of the other leg will become the main force to promote the rise of the index.
In Goldman Sachs' view, a series of factors may promote valuation revaluation, including policy relaxation, current political events and regulatory adjustments. "China may become one of the few countries in the world to adopt loose policies in 2022, which will help to reduce the high risk premium implied in the valuation."
On January 17, China's MLF (medium-term lending facility) unexpectedly lowered 10 basis points (BP). Most institutions expect that China is still expected to offer further easing policies before the Fed officially raises interest rates in March.
the major adjustment stage of industrial regulatory policies has passed
The adjustment of industrial regulatory policies is one of the key factors for the drastic market fluctuations in 2021. Goldman Sachs believes that in terms of intensity, the stage of major adjustment of industrial regulatory policies has passed.
"Judging from our indicators, the market price has reflected the consideration of policy adjustment and change. The policy clarity in the fields of vie structure and overseas listing has also been significantly improved." The agency said.
Wang Yajun, CO director of stock financing business of Goldman Sachs Asia (except Japan), said in an interview with China business recently, "the return of concept shares will continue to be active in 2022, but the general direction of mutual opening and integration of China and the United States capital markets will not change. It is expected that the regulatory authorities of China and the United States can reach a solution to the differences on technical issues such as audit manuscripts."
valuation of China's stock market is attractive
In terms of valuation, compared with the global market, Goldman Sachs believes that the index valuation (12 times) of China's stock market is at a low level in recent years, and there is a significant discount relative to global stocks.
Goldman Sachs said that the current 12-month forward P / E ratios of MSCI China Index and CSI 300 index are 11.6 times and 14.3 times respectively. Relative to their historical levels in the past five years, the valuations are in the quantiles of 5% and 67% respectively. In contrast, when the valuation peaked 11 months ago, the P / E ratios were 18.6 times and 17.1 times respectively. MSCI China's share price also has a large discount compared with global stocks (33% lower than MSCI acwi). Among them, the share price of offshore China Technology (Internet) is 27% lower than that of American technology stocks, which is the largest gap in recent years.
The agency said that at the current price earnings ratio level, the expected rate of return is usually high. According to Goldman Sachs' top-down macro valuation model, the valuation of MSCI China index should be 14.5 times, which means a valuation return of 25%. The current P / E ratio of China's Internet is 21.8 times, close to the low level in the five-year range.
housing related credit is unlikely to drag down the overall market performance
The downside risk of the real estate market has always been a sharp sword hanging over the market. People from all walks of life are still worried that the real estate problem will drag down the overall performance of the stock market.
But Goldman Sachs believes this is unlikely. "Although the liquidity problems of some highly leveraged developers may continue, the negative spillover effects to the wider economy and financial markets should have been basically controlled."
Meanwhile, the agency believes that the reallocation of assets from the real estate market (US $60 trillion) to the stock market (US $13 trillion in A-share size) may accelerate in 2022. "We estimate that Chinese residents will hold 11 trillion yuan of net investable funds in 2022, of which 3 trillion yuan may be allocated to the stock market."
covid-19 reset policy will not be relaxed
At least until the end of 2022, Goldman Sachs believes that China's "dynamic clearing" policy will not be relaxed.
Goldman Sachs said that this means that the recovery of consumer goods stocks is bumpy, but there are trading opportunities in other areas, and more investment opportunities may usher in industries such as pharmaceutical, food and retail, durable goods, communication equipment and logistics.
optimistic about both A-Shares and H shares
Goldman Sachs is optimistic about both A-Shares and H shares because these two markets mean different opportunities for global investors.
In terms of a shares, Goldman Sachs believes that the market is an asset class with large scale, strong liquidity and continuous growth, but insufficient allocation by international investors, with rich opportunities for excess returns. "We believe that A-Shares are a strategic investment asset category that can not be ignored for global equity investors."
H shares provide attractive tactical upward opportunities. "The Internet sector accounts for 40% of the MSCI China Index. The basic outlook is still uncertain, but the overall valuation is sluggish and the position is very light. If our expectations of policy easing and regulatory cycle slowdown come true, the risk return ratio will be remarkable." The agency said.
balanced layout of "backward stocks" and "leading stocks"
In terms of specific sectors, whether to buy "backward stocks" (Internet) or "leading stocks" (policy beneficiary stocks)?
Statistically speaking, Goldman Sachs believes that the probability of performance reversal of these two types of stocks in 2022 is 50%, and the more important alpha generating factor in 2022 is growth. Goldman Sachs is optimistic about the valuation recovery prospects of Internet retail and media. Last year, regulation led to a 40% reduction in their profits. The agency also increased its holdings in cars, consumer durables (such as sportswear) and semiconductor localization concepts, as they will benefit from the trend of paying attention to social equity.
"We will avoid investment related to real estate, especially real estate (state-owned developers are more popular than private developers), materials (especially steel and cement) and banks. With the slowdown of the real estate market and the possible decline of interest rates, the profitability of these industries may be under pressure." The agency said.
Goldman Sachs reiterated that it would continue to focus on the "common prosperity" portfolio and released a list of relevant basket stocks, including 50 A and H shares such as Xiaomi, Longi Green Energy Technology Co.Ltd(601012) , China Tourism Group Duty Free Corporation Limited(601888) , Luxshare Precision Industry Co.Ltd(002475) , Li Ning, Gree, Sungrow Power Supply Co.Ltd(300274) , Jiangsu Hengrui Medicine Co.Ltd(600276) , Ctrip, Anta, Muyuan Foods Co.Ltd(002714) .
