Foreign Institutions Bet Big on Chinese Equities with Optimistic 2025 Outlook

Recent developments in the financial community reveal a growing optimism among major foreign institutions regarding Chinese equities. Firms like Goldman Sachs and UBS have upgraded their ratings on Chinese assets, projecting a recovery in corporate earnings by 2025. This anticipated upswing is expected to attract increased capital inflows into the market.

UBS Securities' China equity strategist noted at a recent forum that despite some volatility in early 2025, the improvement in fundamental factors remains intact. A significant enhancement in corporate earnings for the A-share market is projected, with an anticipated earnings growth rate for the CSI 300 Index at around 6%. Early indicators of this recovery were already visible in data from the fourth quarter of 2024.

The current valuation of the Wind All A Index and the CSI 300 Index fall below their five-year averages, indicating substantial investment value with potential for market growth. An improved investment sentiment is anticipated to drive a fresh inflow of funds from individual investors in 2025, along with long-term capital from insurance and social security funds benefiting from high-dividend stocks under new accounting standards.

Goldman Sachs' chief China equity strategist and his team have projected a 7% and 10% earnings growth for the MSCI China and CSI 300 indices, respectively, in 2025. They recommend an over-allocation to A-shares and offshore Chinese stocks based on favorable risk-return profiles. Market sentiment and liquidity conditions are expected to improve by the first quarter of 2025.

In the medium-term outlook, investors may balance growth and value, favoring large-cap stocks for stability and small-cap stocks as trading volume picks up. High dividend payouts and stock buybacks make Chinese companies appealing, especially to foreign long-term investors. Additionally, internet companies and high-dividend firms on the Hong Kong market remain attractive targets.

Investment strategies should focus on shareholder returns (dividends and repurchases) as dominant factors, with recommendations to lean towards consumer-oriented sectors, online retail, media, and healthcare. Moreover, several foreign institutions, including Morgan Stanley, have raised ratings on Chinese airline stocks and banking institutions, reflecting a positive outlook for China's equity market in the coming years.