China Stocks' Rally Can Sustain for a Bit, Goldman Sachs Says

Where are we in this China rally now You think we’re we’re nearing an end or you think it could actually keep running. Look, I mean Yvonne, we think the rally can sustain for a bit. I mean look I think the the the moves have been pretty strong as you know I mean from the from the bottom of April 16, I think MSCI China or HSCI is already up 1415%. But if you go back since the Jan lows you’ve seen more than 30% rally in the market. But we think it can sustain because a if you look at valuation position that is still kind of pretty pretty low. I think even with the 30% plus rally valuations for MSCI China still at 10 times forward right, which is still one of the most inexpensive market in the in the region. I think from all the positioning data we are tracking, it still seems that both hedge funds in the long only is the positioning is that at five year lows despite kind of the buying in the last few months. So I think those metrics still look pretty supportive. I was I was in US and Europe last couple of weeks seeing investors and I would say there is still very strong interest from from people in the recent weeks to increase allocations to to China. Now in fact I think we are we are picking quite a bit of interest in upside ideas in China both in terms of ETFs and and upside call options. So this is this is how encouraging because it’s different from some of the prior rallies we have seen in China which were kind of much more driven by short covering. But this time around it seems we have sort of genuine investor demand growth from long only as well as hedge funds. So we think this could the moment, right. I mean perfect segue, Sunil talk to us about alpha opportunities this deep into maybe a rally and where you think the money should be flowing into at this point. Sunil. Yeah. Look, I think in general we, we do see pretty much across the region. We are sort of seeing China obviously is seeing inflows in the last few weeks. I mean if you actually look at the hedge fund data, it’s been 3-4 months in a row where China is being net bought by by hedge funds. But as I said, allocations are still low. So I think money is moving clearly into into China. If you look broadly across the region, some of the North Asian markets are also doing pretty well. I think there is obviously the broader value of program going on in Japan going on in in Korea. So I think those markets are also doing pretty well, Hank Sango obviously doing strong as well. So I would say I think it’s India on the margin has been a bit softer and some allocations going out of that. But I think broadly speaking I would say most of the North Asian markets, Korea, Japan, Taiwan as well including China that’s where money is kind of flowing in at the moment. What we are also noticing is that if you look outside of the Asia, many of the China centric markets are sensitive markets actually doing doing pretty pretty well in terms of flows and performance. You’re seeing that in Aussie dollar, you’re seeing that in Brazil, Chile and some of the commodity heavy markets as well. So I would say those are the pockets where where money is more money is more. How are you looking at the earnings picture because we we got kind of mixed reviews of of how you know less bad or I mean and I’m just wondering in terms of downgrades what are you looking at right now in this China equity market and if we we’re still not seeing the fundamentals improve meaningfully, can this rally still continue, I mean that’s a that’s a great question. I want I would say look I mean to some extent part of the rally was obviously driven by entire kind of policy easing around the nine majors but there was a bit of fundamentals to it as well. I mean especially if you sort of looked at the one Q data in terms of macro expectations, they were pretty pretty strong. I mean both V and St. actually raised our numbers in terms of the one QGDP expectations, right. The fourth quarter reporting season which was undergoing until sort of last couple of weeks, they actually came in better than expected. The full year calendar 2023 earnings came in around 9% year on year, so which was sort of certainly better than what the market was anticipating. So I think both in terms of the macro numbers, in terms of GDP, but also I think the fourth quarter reporting season was strong. I think the early data from the first quarter reporting season, we have seen it’s around sort of 3040% in and I would say the numbers have been a tad weaker around 2 to 3% down year on year. But at least what we are seeing is that there are slack sectors where things are starting to see some upgrades. I think consumer tech Internet will be one pocket where at least the numbers are starting to upgrade. I think it’s still we need still more evidence, but our sense is that if if you see the first quarter numbers also holding up better that could give some legs to the rally in terms of fundamentals improving. As you said still the market is seeing in aggregate downgrades. So the so the year to date MSCI China has seen around 3% earnings cuts but selectively there are pockets as I said which are starting to see upgrades. I think consumer and Internet is are the two pockets I would I would point to.