Goldman Sachs: 10 Key Debates On, And Reasons To Buy, China In ‘22

Goldman Sachs answer 10 questions on Chinese stocks as we enter ’22:

1. “Is China investable? We'd say Yes, especially for investors whose investable universe goes beyond the ADR market where forced delisting remains a risk.”
2. “Slowing GDP growth equals bad returns? No. Our economists look for 4.8% GDP growth for 2022, the lowest on record outside of crisis years. But empirically, decelerating GDP growth has low correlation with stock returns.”
3. “Can equities perform well on subdued profit growth? Yes, particularly after a "Major" correction and when the equity cycle morphs from "Despair" to "Hope". Our EPSg estimate (7%) is below consensus (13%) for 2022.”
4. “What could re-rate equities? Policy (easing), politics (transition), and regulation (moderation). China is likely to be an outlier globally to loosen policy in 2022, thereby helping compress the high risk premia embedded in valuations.”
5. “Is the worst of regulation tightening behind us? We think Yes, in terms of its intensity, and the risks seem well priced per our indicators. Policy clarity is also improving, notably on issues such as VIE and overseas listing.”
6. “Are valuations really attractive? Yes. Index valuations (12x) are at recent-year lows and at significant discounts to global equities. Forward returns tend to be strong at current PE levels, inline with the results from our macro PE model.”
7. “Will the property credit turmoil spoil the party? Unlikely. Property activities look set to slow significantly but a contagion scenario could be avoided on GS's base case, inline with the latest pricing in asset markets.”
8. “Will the zero-Covid policy be relaxed? Not until late 2022, implying a bumpy recovery path for consumer equities, but trading opportunities elsewhere.”
9. “China A or H? We like both: China A is a big, liquid, growthy but underowned asset class, and we think China H offers compelling tactical upside optionality.”
10. “Buy laggards (Internet) or winners (policy beneficiaries)? Not a binary decision, but Growth and "Common Prosperity" are the key overlays.”