Since the lunar new year, China’s equity markets have showed signs of a comeback, suggesting a recovery of confidence in the broad economy as well as the equity market, albeit slow, may begathering momentum. Although some challenges persist – such as the travails of the property sector and geopolitical issues – policymakers have rolled out more concerted measures to ensure the sustained recovery. We spoke to Christine Pu and Nathan Lin, co-heads of China equity for Goldman Sachs Asset Management, for their thoughts on China’s economy and stock markets.
China registered better-than-expected GDP growth figures in the first quarter of 2024. What’s your take on that data?
GDP growth has undoubtedly fared better than expected for China in the first quarter. China met its 5% GDP target last year, and clocked 5.3% year-on-year growth in the first quarter this year. Some areas that have been promising include fixed asset investment – driven by faster manufacturing and infrastructure investment – industrial production, and services. On the consumption side, the service sector recovery has been strong, and tourism spending edged over 2019 levels.
But we also need to acknowledge the fragility of the recovery. Since April, we witnessed some slowdown in retail sales, industrial production (driven by the computer and electronics industries). Meanwhile, property markets have remained in negative territory despite easing measures nationwide, with the decline in price and liquidity situation of property companies being key concerns.
We therefore expect certain government policies to remain in place, such as the policies on large-scale equipment renewals and consumer goods trade-in to stimulate demand, the issuance of the 1 trillion RMB ultra-long-term central government special bonds, and the acceleration in local government special-purpose bond (LGSB) issuance, as well as more recent policies for easing in the property sector.
Within this context, how do you view stock earnings and valuations?
We believe earnings and valuations remain attractive and, in our view, have potentially priced in the current backdrop, whilst allocation from foreign investors has stayed historically low. One-year forward multiples for the CSI300 and MSCI China indices stand at 11.6x and 9.6x, well below their historical averages. Earnings are on path to recovery for the CSI300 (Goldman Sachs’ top-down estimate being 9% / 11%) and MSCI China Index (8% / 10%) for 2024 and 2025 respectively, in local currency terms. While some normalization for earnings estimates may be in order, the rebound in earnings for industrials, utilities, and IT do paint a supportive longer-term trajectory.
