Goldman Sachs Shares Rise 1.43% on Chinese Stock Market Optimism

On Thursday, the early trading session saw Goldman Sachs (GS) shares rise by 1.43%, making it the third-best performer among the Dow Jones Industrial Average components. This upward movement in Goldman Sachs' stock price reflects a broader trend of optimism in the market, particularly among institutional investors who are increasingly allocating more funds to Chinese assets.

In recent weeks, there has been a notable increase in foreign investment in China's stock markets. This trend is supported by data showing that active foreign investors have been consistently increasing their allocations to Chinese equities. Goldman Sachs, in its latest report, maintains an "overweight" rating for both A-shares and H-shares, predicting an 8% and 3% increase respectively over the next 12 months. The report highlights that the current rally in Chinese stocks is driven by both liquidity and fundamental improvements, with significant potential for further gains.

The report emphasizes that the current bull market in China is not solely driven by retail investors but is largely supported by institutional investors, both domestic and foreign. Domestic public funds have rapidly increased their equity exposure, reducing their cash holdings to the lowest level in five years. Insurance companies have also increased their stock holdings by 26% this year, while the total assets under management by private equity funds have grown from 500 billion yuan to 590 billion yuan.

Foreign investors have also shown a strong interest in Chinese stocks, particularly A-shares, with August seeing record inflows. The report notes that the MSCI All Country Index, which includes stocks from all countries, has seen about 70% of its gains come from revaluations in price-to-earnings ratios. This global trend of liquidity-driven market gains is also evident in China, where the market is seen as a "latecomer" to this global phenomenon.

Goldman Sachs' report also points out that the current rally in Chinese stocks is supported by fundamental improvements. The report predicts that the normalized profits of listed companies will grow at a mid-to-high single-digit rate from 2025 to 2027. In the first half of this year, onshore and offshore listed companies saw profit growth of 3% and 6% respectively. Additionally, sectors like technology and AI have seen improvements in earnings, with companies returning record amounts of cash to shareholders.

Looking ahead, Goldman Sachs believes that the Chinese stock market has significant potential for further gains. The report notes that Chinese households' asset allocation is heavily skewed towards real estate (55%) and cash deposits (27%), with only 11% allocated to stocks and mutual funds. This is significantly lower than in major global markets. As the real estate market continues to adjust, trillions of yuan are expected to flow from savings and real estate into the stock market over the long term.

Institutional investors also have a significant role to play. Currently, domestic and foreign institutional investors hold only 14% of A-shares, compared to an average of 50% in emerging markets and 59% in developed markets. If institutional holdings were to increase to the average levels seen in emerging or developed markets, it could bring in an additional 140 billion yuan to 300 billion yuan into the A-share market.

Based on these analyses, Goldman Sachs reiterates its "overweight" rating for A-shares and H-shares, predicting an 8% and 3% increase respectively over the next 12 months. The firm's optimistic outlook is supported by the belief that the current rally is driven by both liquidity and fundamental improvements, with significant potential for further gains.