Goldman Sachs highlights a fundamental difference between the current stock market rebound in China and the one in September last year. While the previous surge was driven by policy shifts reducing left-tail risks, the current rally is fueled by technological breakthroughs and innovation, leading to substantial improvements in corporate earnings and valuations. This could make the current rally more sustainable compared to those driven purely by liquidity and policy expectations.
Since the start of the year, China's stock market has experienced a significant upswing, with the MSCI China Index rising by 19%, outperforming developed markets by 18% and emerging markets by 14%. From its recent low, the index has surged 29%, marking the third-largest rebound since the 2009 financial crisis.
Key drivers of this rally include the AI boom, a positive shift in China's tech narrative, and growth-oriented policies established during the National People's Congress. These factors have enhanced market valuations and improved earnings forecasts, collectively pushing the market upwards.
Goldman Sachs notes that hedge funds are cautiously rebuilding positions, while long-term fund managers remain underweight. Southbound investors are buying Hong Kong-listed stocks at record speeds, and index valuations are not overstretched. These signs suggest potential for further gains if policy implementation and profit growth continue.
The Chinese government's growth-focused policies, including a 5% GDP growth target and budgetary measures, align with investor expectations. Although some view the announced fiscal support as modest, Goldman Sachs believes policy responses will be dynamic, depending on external trade pressures and domestic challenges.
The emergence of AI models like DeepSeek-R1 has transformed China's tech sector narrative, raising investor optimism about AI's growth and economic benefits. Broad AI adoption could increase Chinese companies' EPS by 2.5% annually over the next decade, potentially boosting fair valuations by 15-20% and attracting over $200 billion in portfolio inflows.
Goldman Sachs also observes that global mutual funds have reduced exposure to China over the past three years. If these funds increase their allocations to neutral levels, it could generate an additional $30 billion in demand for Chinese stocks.
