Goldman Sachs leads bullish chorus on Chinese stocks, as Morgan Stanley and JPMorgan’s private bank remain cautious


  • ‘It’s too early to leave the party,’ says an HSBC analyst as Goldman raises its index targets by at least 5 percent
  • JPMorgan Private Bank calls an end to the rebound and advises investors to sell Chinese stocks, particularly offshore shares

A spectacular run in Chinese stocks has divided global investment banks into two camps, with Goldman Sachs, UBS Group and HSBC Holdings firmly in the bullish camp while Morgan Stanley and JPMorgan Chase’s private banking unit remain cautious.

Goldman has raised its targets for both the MSCI China Index and the CSI 300 Index by at least 5 percent this week to reflect diminished tail risks and earnings optimism. UBS and HSBC also expect continued gains, arguing that the rally will be underpinned by policy support and depressed valuations.

On the flip side, Morgan Stanley said that earnings growth for Chinese companies will be disappointing this year and next, and JPMorgan Private Bank is even more pessimistic, believing that the liquidity-driven rise has largely run its course amid a lack of fundamental economic improvement.

The split views show that the global investment community has yet to reach a consensus on the outlook for Chinese stocks, even after some key gauges have already charged into a bull market and top policymakers have become more serious about tackling the property-market crisis, seen as a major drag on growth and stocks.

The MSCI China Index, the benchmark widely used by overseas investors, has risen 32 percent from a January low, and the Hang Seng Index has climbed 28 percent in the same span, both surpassing the 20 percent gain defined as a bull market.

Historical data favours a continuing rise, according to Goldman. Examples over the past two decades show that there is a 60 percent probability that stocks will extend gains after entering a bull market, fetching an average peak of 35 percent in the following six months, it said.

“A resilient economy, strong manifestation of policy support across the macro, housing, and capital-market dimensions, together with suppressed starting points on valuations and investor positioning/sentiment, are key ingredients to the re-rating process,” analysts led by Kinger Lau at the investment bank wrote in a report issued on Monday.

Goldman raised its 12-month targets by 17 percent to 70 for the MSCI China Index and by 5.1 percent to 4,100 for the CSI 300 Index of yuan-traded stocks, saying that the driver for stocks will shift to earnings from valuation expansion.

The targets imply a gain from the current levels of 7.7 percent for the MSCI gauge and 12 percent for the CSI 300.

The valuation edge is one of multiple factors that will power ahead Chinese stocks trading in Hong Kong, which have price-to-earnings ratios below the five-year average even after the recent gains, according to HSBC.

“Share buy-backs can rise significantly more, interest rates can fall further, and much of the buying in Hong Kong has been from mainland China, which suggests global funds still have room to buy more,” said Herald van der Linde, a Hong Kong-based strategist at HSBC Holdings. “This all suggests that in the near term, Chinese equities could rally higher. It’s too early to leave the party.”

UBS expects Chinese stocks to narrow their discount to other emerging markets under President Xi Jinping’s common prosperity initiative. An unprecedented nine-point guideline document from the State Council outlining the reform path reflects top leaders’ attention to the capital market, which could become a place for citizens to preserve their wealth during the property market’s persistent downturn, according to Meng Lei, a strategist at the Swiss bank.

In the opposite camp, Morgan Stanley said it remained 14 percent below the consensus earnings projections for the companies on the MSCI China Index due to China’s weak nominal economic growth and the prospect of a weakening yuan.

JPMorgan Private Bank called an end to the rebound and advised investors to sell Chinese stocks, particularly offshore shares, because of a lack of a meaningful policy shift that would restore investors’ confidence.

“Most of the offshore Chinese equity rally was driven by liquidity flows and asset reallocation from onshore investors, but these factors are unlikely to bring a meaningful earnings boost on the index level, nor a structural re-rating on multiples,” said Alex Wolf, the bank’s strategist. “The key catalyst for [global] investors tends to be fundamental factors around underlying nominal growth and corporate earnings. At the moment, that remains to be seen.”

Without a definite answer for the direction of the market, the best strategy is probably to wait and gauge the impact of last week’s sweeping package of rescue measures for the property market, according to UBS Global Wealth Management. Such a stabilisation would serve as a catalyst for a broad-based recovery in consumption and an uptick in stocks.

“We have raised our base case and upside targets for the MSCI China index, though for now this mostly reflects improving earnings forecasts for select internet names,” UBS Global said in a note. “We recommend investors shift their China equity exposure to a more balanced barbell that features both growth names and state-owned enterprises.”



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Edmund Shing, PhD

Global Chief Investment Officer
BNP Paribas Wealth Management

Edmund has over 29 years of experience in financial markets in a wide variety of positions, ranging from proprietary trading to portfolio manager in a number of financial institutions in London and Paris.  He previously held the role of Global Head of Equity and Derivative Strategy at BNP Paribas in London from 2015 to 2020, and has been Chief Investment Officer at BNP Paribas Wealth Management since November 2020.

Edmund is responsible for piloting our investment strategy and will continues to rollout out recommendations and themes with actionable advice that brings our expertise to our clients and support to our client-facing teams.  In this time of change, his expertise in following and anticipating markets is a true value added for both our customers and those at Wealth Management who serve them.

Edmund has a PhD in Cognitive and Computing Science from the University of Birmingham in the United Kingdom, and has done advanced studies in Knowledge-Based Systems and in Experimental Psychology.  He is an EFFAS-certified financial analyst. He has also authored the book “The Idle Investor” published by Harriman House in 2015, proposing 3 simple investment strategies that take only a few minutes to execute per month.

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