Goldman Sachs recommends overweight position on China stocks in Q4, expects H-shares to outperform A-shares

 

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Goldman Sachs is recommending an overweight position on China stocks in a bet for a possible rebound before the end of this year, adding that H-share expected to outperform A-shares.

Goldman developed a “market rotation model” by examining 30 macro and market factors frequently used in a top-down framework for ex-ante forecasting of return differentials between A- and H-shares.

Based on the model, the bank forecast that the potential returns of the Hang Seng Index, the Hang Seng China Enterprises Index and the Hang Seng Tech Index in the four quarter of this year will reach 5%, 6% and 12%, respectively, while that for China’s Star 50 Index, the Chinext Price Index and the CSI 300 Index will reach 7%, 3% and 3%.

China stocks usually refer to A-shares, H-share and ADR, which account for 76%, 18% and 6% of the total China stoks, based on market capitalization, it said.

So far in 2023, the MSCI Overseas China Index and the Shanghai Composite index have gained 5% and 1%, respectively, while the Chinext Price Index and the Hang Seng Index have declined 15% and 12%. The CSI 300 Index has dropped by 5%, the Star 50 Index 8%, the Hang Seng Tech Index 8%, the Hang Seng China Enterprises Index 11% and the MSCI China Index 11%.

In the next three months, there is 70% chance that H-shares may lead A-shares by about 5 percentage points due to the relatively low valuation of H-shares and the recent mainland capital inflows to Hong Kong stocks via the Stock Connect, the bank said. 

On a tactical basis, Goldman prefers the offshore market, in particular considering that the southbound fund inflows indicates that there will likley be a rebound before the end of this year.

Strategically it prefers A-shares which are less sensitive to geopolitical and liquidity factors and tend to be better correlated with domestic policies and cyclicality.