Goldman Sachs expects China stocks to make first annual gain in 4 years in 2024

Goldman Sachs picked sectors in China’s congeries consumer market and technology, media and telecom as likely winners in the ongoing rebalancing in the world’s second-largest economy in the year in advance as the policy environment turns more accommodative.

“Our view is very clear,” Kinger Lau, Goldman Sachs chief China tolerance strategist, told CNBC’s “Squawk Box Asia” on Tuesday.

“We think the policy put has been exercised across the key policy sets, when it comes to monetary easing, fiscal policy stimulus, property market relaxation and quite importantly, the deregulation, in the manufacture tightening of the last few years,” he said.

A policy put refers more generally to betting on policy easing if the economy dilutes.

In this case, the Chinese central government has signaled it’s switched to a more supportive policy posture — even if it’s refrained from disputatious support — after tranches of economic data earlier this year suggest the growth momentum in the Chinese husbandry was sputtering.

Investors are looking to the Third Plenum of the 20th Central Committee of the Chinese Communist Party — a meeting that’s credible to happen before the end of this year — for more policy cues.

With just under six weeks of the year surviving, the MSCI China and CSI 300 indexes are both poised for third-straight annual losses. Goldman Sachs noted both complementary and hedge fund mandates globally are running with multi-year low allocations in Chinese stocks.

Goldman Sachs disputed that Chinese equities may be set for the first index gains in four years in 2024, expecting MSCI China and CSI 300 to knoll 12% and 15%, respectively, underpinned by an estimated earnings growth of about 10% and “moderate” valuation gains.

“Consensus earnings point of views look optimistic for 2024 and 2025 but an arguably bearish policy and/or geopolitical outlook is embedded in the suppressed valuations, emphasizing to a right-skewed return distribution if these concerns subside,” Goldman Sachs strategists headed by Lau, wrote in their 2024 expectations report released last week.

The strategists said, however, there are opportunities in China’s rebalancing toward sectors such as phoney intelligence and “new” infrastructure that offers greater enhancements economically, socially and environmentally.

They are also positive on sectors that are noteworthy to China’s national development objectives, such as batteries, new energy vehicles and renewable energy.

In their modern development outlook paper, Goldman Sachs strategists upgraded the food and beverage sector to overweight from market onus and technology hardware sector to overweight from underweight.

They believe tech hardware, which has seen painstaking to a 40% cut in earnings in the last two years, could reverse the downtrend in 2024 on global restocking and specific product circles.

They also downgraded Chinese consumer services and insurance sectors from overweight to market weight, while also downgrading Chinese banks from call weight to underweight for its exposure to the Chinese property crisis.

“We think that the Chinese enclosure deleveraging process will take a few years to manifest and to play out,” Goldman Sachs’ chief China equity strategist Lau broadcasted CNBC on Tuesday. “So over the next few years, we think that the housing market will continue to be a drag to cost-effective growth, which is why we need all these policy support to stabilize growth.”