Despite many uncertainties, the overall outlook remains bullish!
According to the latest Research Reports from Goldman Sachs, the stance on Shareholding in China's A-shares and Listed in Hong Kong is maintained, stating that growth driven by AI and supportive liquidity are key catalysts. Analysts expect that H-shares will further benefit from advancements in AI, while A-shares still have room to catch up, potentially narrowing the performance gap.
Goldman Sachs believes that as Global Funds increase their investments in China, H Shares may still be the preferred choice, even though there may be short-term improvement in A Shares. It is expected that A Shares will outperform H Shares in the next three months, and the premium rate of A Shares over H Shares has narrowed from 34% three months ago to 14%. If it returns to the average level of the past year, A Shares may have about a 10% upside potential.
Goldman Sachs has a bullish outlook across the board.
Since the release of DeepSeek-R1 in January this year, the market sentiment towards Chinese assets has been bullish. Data from Goldman Sachs shows that since the low point in January, $MSCI Chinese Index (LIST2614.US)$ has risen by 26%, among which is $Hang Seng TECH Index (800700.HK)$ The Chinese Internet Sector represented by the sector surged by 31%, while the A-shares only rose moderately by 7%.
Wall Street Journal cited Goldman Sachs' latest report stating that when the return gap between A-shares and H-shares exceeds 15%, there is a 95% probability of market leadership reversal. Based on this, Goldman Sachs believes that supported by valuation advantages and policy expectations, A-shares are expected to experience a catching-up rebound within the next three months, with an anticipated excess return of 2%.
The valuation premium of A-shares relative to H-shares has narrowed from 34% three months ago to the current 14%. If it rises back to the average level of the past year, it means A-shares have about a 10% potential for valuation increase.
The valuation advantage of A-shares is evident. Goldman Sachs' A-H market rotation model indicates that market leadership may rotate within the next three months, with A-shares expected to deliver a 2% excess return. Over the past three months, the return gap between A-shares and H-shares has widened to 15%, reaching the 99th percentile of historical range, marking the second largest return gap since 2018 — only surpassed by the 30% excess return of the MSCI Chinese Index over the CSI300 Index from November 2022 to February 2023.
Goldman Sachs noted that historically, the relative return between A-shares and H-shares usually fluctuates within ±10% over three months, and when the relative return exceeds this range, there is a high probability of reversal. Experience shows that when the return gap between A-shares and H-shares exceeds 15%, there is a 95% probability that market leadership will reverse.
Goldman Sachs' data shows that the PE ratios of MSCI China and CSI300 are 11.5 times and 13.1 times respectively, the AH valuation premium has narrowed from 34% three months ago to 14%, and if it rebounds to the average level of the past year, this indicates that the A-share valuation re-evaluation space is about 10%.
Goldman Sachs also believes that supportive domestic policies will favor A-share performance. The upcoming "Two Sessions" will reiterate an expansionary fiscal policy stance and provide more implementation details, which may drive A-share returns to exceed H-shares as A-shares are more sensitive to policy statements and have a broader industry distribution. In terms of capital flow, as global funds further increase their allocation to China, H-shares may continue to be favored, while if domestic retail investors become more involved, A-shares may receive support.
Is the re-evaluation trend further spreading?
From the market performance this morning, despite some unfavorable factors over the weekend, the market remains strong overall. The number of rising stocks once exceeded 3,200, surpassing last Friday's closing data.
HTSC pointed out that last week the A-shares fluctuated upward, with Alibaba's earnings report exceeding expectations, driving the Technology Sector up in the latter half of the week. The re-evaluation of Chinese Assets may further diffuse.
First, positive factors such as the business environment for Industry, real estate, and private enterprises continue to emerge. Alibaba's earnings report exceeding expectations is likely to promote a transition from AI Thematic Investment to investments in industrial tracks.
Second, global funds are rebalancing between US and Chinese equity assets. Currently, the participation of active foreign capital in this round of market is still low. If long-term foreign capital flows back subsequently, domestic advantageous industries and high ROE assets preferred by foreign capital may benefit.
Third, referencing past industrial cycle trends, strengthening industrial logic may raise the central point of congestion. Currently, it may be appropriate to relax the tolerance for congestion. In terms of allocations, the Electronic and Media Sectors are relatively congested, continuing to rotate within Technology, with attention on low-position sectors benefiting from AI, such as Pharmaceuticals and Finance.
Everbright's research report indicates that recently, Hong Kong stocks$Alibaba (BABA.US)$released earnings reports, and foreign capital collectively turned bullish on Chinese technology stocks, reigniting market enthusiasm for AI themes. The market volume has also returned to a 2 trillion state, marking a rise in both volume and price. With incremental funds coming in, strong market volume, and heightened market sentiment, a short-term structural trend in AI is expected to continue. Before the important meeting in March, this may still be an active period for thematic stocks. Attention may also be paid to low-position rebound directions with policy expectations, with rotational opportunities likely to follow.
Overall, market sentiment remains good, with a strong bullish atmosphere and positive future expectations. However, based on past experiences, as volume increases and previously hot stocks fully ferment, market volatility might also increase. In this context, it may be necessary to appropriately control the risk of drawdown.
Editor/rice