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As MSCI China Index – which captures large and mid-cap representation across China – is up 24% from its March lows, Wall Street is getting more constructive on Chinese equities.
Goldman Sachs strategist Kinger Lau took note of the MSCI China Index outperformance, which is “the strongest 3m outperformance vs. SPX in the past decade at a time when global equities endured the worst 1H returns since 1970.”
The strategist notes that China is back again on investors’ radar as the risk of recession increases.
“China growth should firm in 2H on policy easing and Covid normalization, but GS economists see a 48% probability of the US/global economy falling into a “shallow” recession over the next 24 months. In that scenario, 2023 earnings and fP/E would be 4% and 7% lower from current levels, combining to 11% index downside barring any potential policy offset,” Lau told clients in a note.
He added that “China is no longer on sale” given the recent rally in shares with China Internet stocks up roughly 45% since mid-March.
However, China’s outperformance case stays intact as:
1) China appears well-positioned in its growth, inflation, and policy cycles vs. the rest of the world;
2) China usually performs well in 2H and in the run-up to the Party Congress; and
3) upside risk from light MF/HF positioning and rising demand for non-US equity beta.
Finally, the strategist reiterated the bank’s stance – stay Overweight sectors such as Internet, Autos, Semi, and Durables.
Similarly, Morgan Stanley analyst Erik Woodring sees a chance for US IT hardware names, such as Apple (NASDAQ:AAPL), Dell (NYSE:DELL), Logitech (NASDAQ:LOGI), and HP (NYSE:HPQ), to benefit from the re-opening.
These stocks have “the greatest revenue exposure to China and could benefit near-term from a China re-opening”.
The analyst adds that many hardware stocks could also “benefit from the partial rollback of Chinese tariffs, although the impact to margins is likely minimal”.
