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Wednesday, May 22, 2024

Goldman Sachs chooses Chinese stocks despite Japan’s stagnant economy

The China playbook is changing, and after decades of rapid growth, it remains to be seen whether the country is headed toward an extreme of Japan-style stagnation. China’s attempt to transition to what Beijing calls high-quality growth will take time to play out. But don’t worry, Goldman Sachs calls the China story today one of “rebalancing,” and has picked 40 buy-rated stocks to play the theme. According to Goldman’s Chief China Equity Strategist Kinger Lau and a team, there are ways to make money even in a sustained bear market, akin to the experiences from Japan’s lost decades. They predict certain consumer names, artificial intelligence companies, and rising global players will be among the Chinese stocks that can do well.

However, China equities have yet to shake off the doldrums of 2023. The mainland Chinese and Hong Kong stock indexes are all down for the year so far. But there is hope. According to Morgan Stanley’s Chief China Economist Robin Xing, a swifter shift to active fiscal easing and economic rebalancing towards consumption could be the way out of this slump. Keep an eye out for December data and fourth-quarter GDP due out late Tuesday New York time, as they may give more clues on China’s economic trajectory — and whether policymakers need to act.

The report from Goldman predicts that China grew by 5.3% last year, and forecasts a slowdown to 4.8% this year. Despite this, MSCI China has recorded three +10% tradable rallies during the year, leading to gains typically centered on policy expectations. However, there is still a level of uncertainty, as both mutual and hedge fund mandates globally are running multi-year low allocations to Chinese stocks.

China’s top officials are stepping up engagement with the international finance world again, with Premier Li Qiang set to speak at Davos and Chinese Vice Premier He Lifeng meeting with global financial executives.

Goldman’s rebalancing stock picks include companies that Chinese authorities have selected to support out of strategic interest. These “little giants” include Friendess Electronics, Asymchem Laboratories, StarPower Semiconductor, and SICC. These companies are making waves and are part of China’s strategy to bolster domestic tech capabilities while dialing back on debt-driven growth.

Even under a state more concerned with security, private sector investment in manufacturing is “very strong,” as pointed out by Arthur Kroeber, partner at Gavekal Dragonomics. Beijing’s official language casts the matter as one of “high-quality development,” and the pursuit of balanced and positive interplay between security and development.

So, as the China playbook evolves, it’s important to keep an eye on this rebalancing of the market and to be aware of the opportunities it presents. With the right investment choices, there are still ways to make money and capitalize on high-quality growth in China. Keep an eye on those stock picks and stay tuned for further developments.

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