Goldman Sachs Predicts 15% Upside for Shanghai-Shenzhen 300 Index Amid Tariff Impact

Goldman Sachs has adjusted its outlook on China's macroeconomic policies in response to the Trump administration's imposition of retaliatory tariffs, which have weighed on the global economy. The firm expects the People's Bank of China to intensify its interest rate cuts and expand the scale of social financing. On the fiscal policy front, the deficit rate is anticipated to widen, with a focus on bolstering domestic demand.

Hao Xianhui, Goldman Sachs' Chief China Economist, noted that the impact of tariffs on China's economy exhibits diminishing marginal effects. The structural differences in Sino-U.S. trade—where China's exports to the U.S. are predominantly manufacturing goods with strong short-term irreplaceability, while China's imports from the U.S. are mainly bulk commodities with high substitutability—mean that the U.S. is more dependent on Chinese imports than vice versa.

In the capital markets, Goldman Sachs remains optimistic about Chinese equities within the Asian region. The firm's China equity strategist, Fu Si, highlighted that A-shares, due to their policy sensitivity and the dominance of domestic capital, are expected to outperform H-shares. Fu Si recommended focusing on consumer and domestically driven sectors and stocks.

The firm's analysis underscores two key characteristics of tariffs' impact on China's economy: first, the marginal effect of tariffs on economic growth diminishes as tariff levels reach a certain threshold; second, China's imports from the U.S. have relatively high substitutability, while some U.S. imports from China are difficult to replace in the short term. This is particularly evident in the manufacturing sector, where China's exports to the U.S. are concentrated in machinery and equipment, while China's imports from the U.S. are mainly bulk commodities.

Goldman Sachs' latest research report indicates that the MSCI China Index and the Shanghai-Shenzhen 300 Index are expected to have 11% and 15% upside potential, respectively, over the next 12 months. The firm also suggests that strategic allocation opportunities in A-shares are superior to those in H-shares.

The report notes that global allocation funds have historically high holdings in U.S. equities, while their allocation to Chinese equities remains at a historical low. This discrepancy creates space and potential for medium- to long-term capital inflows into Chinese equities. Factors such as the evolution of U.S.-China relations, revaluation of U.S. tech stocks, and portfolio adjustments could drive structural shifts in global capital flows.

From a capital flow perspective, the current net long position of hedge funds in China's market is at 8.7%, which is at the 54th percentile of the five-year historical range. Meanwhile, the positions of global active funds remain at the bottom, with limited downside risk. The recent valuation-driven effects in China's AI industry chain have attracted overseas hedge funds and active managers to increase their allocations to China's market. Despite recent market volatility, there has been no significant panic selling, and the scale of capital outflows is limited.

Looking ahead, Fu Si advises a continued focus on consumer and domestically driven sectors and stocks. Key areas include consumer services and the internet, which are crucial components of domestic consumption. Additionally, the pharmaceutical sector is expected to benefit from improvements in local government consumption spending.