Goldman Sachs, Morgan Stanley Bullish on China's AI, Earnings Growth

On the eve of April 2nd, Goldman Sachs and Morgan Stanley's China strategy teams both expressed bullish sentiments about the Chinese market. Goldman Sachs, based on its investor research, noted that investors remain calm regarding tariff concerns. The firm believes that China's AI narrative is seen as a game changer, expected to attract significant funding and contribute to the growth of Chinese companies' earnings per share (EPS) over the next decade.

Goldman Sachs' survey results indicate that the vast majority of investors view China's AI development as a true 'game changer.' Analysts expect that the widespread application of AI technology will contribute approximately 2.5% annual growth to the EPS expectations of Chinese companies over the next decade. This technological revolution is not only expected to enhance corporate profitability but also to attract substantial portfolio investments into the Chinese market, providing continuous funding momentum for the stock market.

Additionally, Goldman Sachs stated that there may be three key reasons behind investors' calmness regarding tariff concerns. First, due to the decrease in China's direct exports to the USA and the continuing improvement in product competitiveness, the sensitivity of the Chinese economy to US tariff impacts has decreased. Second, under the threat of tariffs, the RMB exchange rates have generally remained stable, which further strengthens market confidence. Finally, investors are betting that China and the USA may reach a comprehensive agreement in the coming months, ultimately leading to a reduction in tariffs rather than a continued escalation.

Furthermore, Goldman Sachs pointed out that global fund managers are generally willing to return to the Chinese market, which will provide additional upward momentum for the Chinese stock market. Morgan Stanley, on the other hand, holds a cautiously optimistic view on the prospects of the Chinese market. The firm believes that with improved earnings expectations and valuation recovery, the market is expected to achieve further upward movement.

Morgan Stanley's analysis shows that the MSCI Chinese Index constituent stocks showed unexpectedly good quarterly performance for the first time in three and a half years. The earnings reports for the fourth quarter show a net earnings surprise of 8% when calculated by both the number of companies and market cap, which is the first time since the third quarter of 2021, ending a 13-quarter period of performance disappointment. This performance improvement is evenly distributed and not concentrated among a few large-cap companies, indicating a healthier recovery.

Morgan Stanley raised the earnings growth forecasts for the MSCI Chinese Index for 2025 and 2026 to 7% and 9%, respectively. The firm also expects that the valuation of the MSCI Chinese Index will align with that of the MSCI Emerging Markets, eliminating the long-standing discount. Currently, the 12-month forward PE of the MSCI Chinese Index has risen, and the discount to the MSCI Emerging Markets has narrowed.