According to Goldman Sachs strategists, by the end of this year, Chinese stocks could rise by as much as 24% due to an economic transition from “reopening to recovery.”

According to a note published on Monday, the company anticipates a potential 24% increase in the MSCI China index as the nation transitions from the reopening that followed its strict zero-Covid policies to a growth phase.

“We believe the principal theme in the stock market will gradually shift from reopening to recovery, with the driver of the potential gains likely rotating from multiple expansion to earnings growth/delivery,” Goldman Sachs strategists including chief China equity strategist Kinger Lau said in the note.

Chinese stocks started to rise this year around the Lunar New Year, with the MSCI China index reaching its peak at the end of January, nearly 60% higher than its October lows.

As of Friday’s close, the index had dropped by about 8% from its peak on January 27. An index is generally deemed to have experienced a market correction when it drops by more than 10% from its most recent peak.

MSCI China monitors more than 700 Chinese companies with international listings, including Tencent, BYD, and Industrial and Commercial Bank of China. Goldman Sachs forecasted zero growth in index earnings in July.

They wrote that the actions will be “similar to a change from the Hope to Growth phase in a typical equity cycle” and that Covid is “arguably in the rear view mirror” in China at the moment.

The strategists wrote that the country’s most recent purchasing manufacturers index and consumption levels show “clear signs of activity normalization, albeit from a low base.”

Goldman Sachs projects that the Chinese economy will expand by 5.5% in 2023 overall, driven by growth in the second and third quarters that it now pegs at 9% and 7%, respectively.

“The growth impulse should be heavily tilted towards the consumer economy, where services sector is still operating significantly below the 2019 pre-pandemic levels,” they wrote, highlighting Chinese households have excess savings of more than 3 trillion yuan ($437 billion) this year.

Citing data from the company’s prime brokerage, the strategists added that professional speculators are demonstrating a greater appetite for Chinese stocks.

“Hedge fund investors have substantially re-risked in Chinese stocks, predominantly in Offshore equities per GS Prime Brokerage, with their net exposures in China relative to their total equity exposures globally almost reverting to all-time highs,” they wrote.

(Adapted from CNBC.com)

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