Goldman joins the China-equity bull party after missing rally

[HONG KONG] Goldman Sachs Group Inc is joining the rush on Chinese shares, becoming the latest major brokerage to upgrade the market thanks to mounting evidence of strength in the largest Asian economy.

The bank's strategists are now overweight on Chinese stocks, with their 12-month forecast for the MSCI China Index boosted to 73 points from 68, according to a note dated Monday from Goldman analysts including Kinger Lau and Timothy Moe in Hong Kong. That represents a gain of almost 25 per cent for 2017.

The MSCI China gauge has already climbed 11 per cent this year, outpacing the wider Asian region and the 5.6 per cent advance in global stocks. Improving economic data have burnished the appeal of Chinese assets since Goldman lowered China to market-weight on Dec 1.

Analysts anticipate that policy measures will continue to be supportive given the twice-a-decade Communist Party conclave later this year, when a reshuffle among senior ranks is expected.

"Policy and growth dynamics should stay conducive leading up to the 19th Party Congress," the analysts wrote.

Other factors underpinning Goldman's upgrade include:

- Earnings: The analysts have upgraded their forecasts twice in a month, with their outlook for EPS gains at 13 per cent for this year and 11 per cent for 2018. Recent declines in both Hong Kong and mainland markets have provided a better entry level.

- Goldman estimates there will be US$54 billion of investment flows from mainland China into Hong Kong in 2017.

- Chinese banks and property stocks are seen extending gains, with Goldman lifting them to overweight and market-weight respectively. The firm is not so keen on defensive shares, including telecommunications, consumer staples and utilities, which were shifted to underweight.

Goldman listed risks to their outlook that include a potentially more hawkish People's Bank of China - a possibility flagged by other investors as well.

The Federal Reserve's tightening cycle may also weigh on the yuan's exchange rate with the US dollar, as could the continuing overhang of a conflict over trade between the US and China.

BLOOMBERG