Reopening to recovery: Goldman Sachs sees China stocks surging as much as 24% by end of 2023

Goldman Sachs strategists see an economic shift from “reopening to recovery” driving Chinese stocks as much as 24% higher by the end of this year.

The firm sees a potential 24% upside to the MSCI China index as the country moves past the reopening that followed its stringent zero-Covid policies to a growth phase, according to a Monday note.

“We believe the principal theme in the stock market will gradually shift from reopening to recovery, with the driver of the potential gains likely rotating from multiple expansion to earnings growth/delivery,” Goldman Sachs strategists including chief China equity strategist Kinger Lau said in the note.

Chinese stocks entered bull market territory around the Lunar New Year earlier this year – with the MSCI China index peaking at the end of January up nearly 60% from lows seen in October.

As of Friday’s close, the index had lost about 8% since its Jan. 27 peak. That puts it close to market correction territory, typically defined as when an index falls more than 10% from its recent peak.

MSCI China tracks more than 700 China stocks listed globally, including Tencent, BYD and Industrial and Commercial Bank of China. Goldman Sachs in July cut its earnings outlook for the index to zero growth.

The moves will be “reminiscent of a transition from the Hope to Growth phase in a typical equity cycle,” they wrote, adding that Covid is now “arguably in the rear view mirror” in China.

Its latest purchasing manufacturer’s index as well as consumption levels show “clear signs of activity normalization, albeit from a low base,” the strategists wrote.

Goldman Sachs expects China’s economy to grow by 5.5% in full-year 2023, powered by second- and third-quarter growth that it now puts at 9% and 7%, respectively.

“The growth impulse should be heavily tilted towards the consumer economy, where services sector is still operating significantly below the 2019 pre-pandemic levels,” they wrote, highlighting Chinese households have excess savings of more than 3 trillion yuan ($437 billion) this year.

The strategists added professional speculators are showing a greater appetite for Chinese stocks, citing data from the firm’s prime brokerage.

“Hedge fund investors have substantially re-risked in Chinese stocks, predominantly in Offshore equities per GS Prime Brokerage, with their net exposures in China relative to their total equity exposures globally almost reverting to all-time highs,” they wrote.