Goldman Sachs A Hong Kong Stock 2025 Heavyweight Strategy Outlook: Domestic Capital Will Hold Pricing Power! Short-term Overweight First A Then H, Industry Focus on Consumer Stocks!

Goldman Sachs believes that with the combined effects of policy stimulus, improved corporate earnings, and increased share buybacks, the Chinese stock market is expected to rebound next year, with the MSCI China Index and the CSI 300 Index projected to rise by 15% and 13% respectively by 2025.

In the short term, Goldman Sachs favors A-shares more. Analysts believe that compared to Hong Kong stocks, A-shares are more sensitive to policy easing and the flow of personal investment funds. Due to overseas factors and the implementation of domestic policies, the first quarter of next year will be a better time to allocate to Hong Kong stocks. In terms of sectors, analysts suggest that investors focus on themes such as consumer sectors, emerging market exporters, specific new technologies, and shareholder return strategies.

"The most extreme risk scenarios have been ruled out"

Goldman Sachs' chief China equity strategist Kinger Lau's team stated in their annual strategy report on November 18 that under policy stimulus, domestic consumption and certain investment areas are expected to grow next year. Benefiting from more targeted fiscal spending and consumption subsidies, the recovery of the service industry, and the positive wealth effect brought about by rising financial asset prices, consumption growth is expected to rebound from 3.8% this year to 5% next year.

Goldman Sachs stated that since the Politburo meeting in September, the most extreme risk scenarios in the market have been ruled out:

As conveyed in the September briefing, the policy goal has shifted from risk containment to growth maintenance.

Policy responses are coordinated and delivered in a package rather than in a fragmented manner.

Policies are increasingly focused on demand-side measures, so the multiplier effect of policies may lean more towards domestic impacts, with lower external spillover effects.

Stimulus measures are led and initiated by the central government and the central bank; unprecedented innovative measures have been taken to boost the stock market.

Goldman Sachs believes that investors have now transitioned from the "expectation phase" of policies to the "confirmation phase," which means that seeing policy details is necessary to further boost confidence.

Analysts expect further easing of monetary policy next year, including reserve requirement ratio cuts and interest rate reductions, while the fiscal deficit will continue to expand to support real estate destocking, local government debt swaps, bank capital restructuring, and stimulate consumption and investment.

The expansion of the fiscal deficit also has a positive effect on corporate earnings. Goldman Sachs estimates that for every additional 1 trillion yuan of fiscal deficit (equivalent to 0.8% of GDP), it could drive next year's EPS growth by 2 percentage points.

Regarding the export issues that the market is concerned about, Goldman Sachs currently expects that export volume in 2025 will remain basically flat compared to the high base in 2024, with export growth to other countries offsetting the adverse impact on exports to the U.S.

From an economic theme perspective, Goldman Sachs believes that under policy support, consumption and infrastructure may become key contributors to market profits, and as the low base effect begins to take effect, the drag of the real estate market on profits may ease. In certain scenarios, policy-driven supply-side reforms could also benefit capital-intensive industries such as automobiles, solar energy, and others through healthier profit margins.

Foreign capital influence weakens, domestic capital will play a leading role

Goldman Sachs believes that considering the current low allocation of foreign capital in the Chinese market, domestic capital's influence on the market may further expand next year.

After 2020, overseas hedge funds experienced several rounds of rapid fluctuations in their allocation to the Chinese market, with current net long/total exposure at 7.1%/5.6%, which is at the 11%/22% percentile of the 5-year average, reflecting that they are still oriented towards short-term opportunities. In terms of long-term funds, the global $3.5 trillion mutual fund assets are also insufficiently allocated to Chinese stocks.

However, benefiting from the surplus of 45 trillion yuan in household deposits and regulatory support, domestic investors have significant potential to increase stock allocation. The national team accounts for about 5.4% of the A-share market value, and may further increase participation through the National Stabilization Fund in the future.

Share buybacks by listed companies will also be favorable for the stock market. In the third quarter of 2024, the stock buyback amounts in the Chinese A-share and H-share markets both reached historical highs, totaling $23 billion. Goldman Sachs predicts that the total buyback amount will nearly double by 2025, reaching $70 billion. This is mainly due to policy support (the central bank's 300 billion yuan relending support), robust operating cash flow, and still relatively high equity capital costs.

Short-term Preference for A-shares, Hong Kong Stocks to Wait Until End of Q1

Goldman Sachs believes that A-shares and Hong Kong stocks are still at relatively low valuation levels compared to global stocks, making them very attractive.

Currently, the MSCI China Index is trading at a discount of 46% and 23% relative to developed markets (DM) and emerging markets excluding China (EM e-China), respectively. Although the earnings growth situation next year may be similar or even better, these two discount levels are at high points within their respective historical ranges.

Goldman Sachs expects that the adjustment of capital flows triggered by policies may accelerate in 2025, with enterprises, domestic individual investors, southbound funds, and government-related investment institutions likely to increase their holdings in the stock market. Next year, the MSCI China Index and the CSI 300 Index are expected to rise by 15% and 13%, respectively, with earnings per share (EPS) growth of about 7% and 10%.

Due to being more sensitive to policy easing and less affected by external risks, Goldman Sachs prefers A-shares in the short term. Goldman Sachs expects that the improvement in Hong Kong stocks will need to wait until the end of the first quarter of 2025, when the clarity of overseas risks and domestic policy easing may become more apparent.

Industry Allocation: Follow the Consumers

In terms of industry allocation, Goldman Sachs recommends that investors focus on themes such as government consumption, emerging market exporters, selected new technologies, and shareholder returns.

Goldman Sachs stated that driven by policies, government consumption expenditure is expected to rebound significantly, with benefiting sectors including automobiles, retail/services, medical devices, and infrastructure projects. Areas supported by the government, such as the digital economy, green energy, and intelligent manufacturing, are also worth focusing on.

Goldman Sachs particularly emphasizes that although market themes focusing on shareholder returns, such as high dividends, have achieved strong market returns over the past year, this theme will still be worth investors' attention in 2025:

There are already clear policies and delivery methods in place to enhance shareholder returns; the ability of listed companies to return cash to shareholders looks very promising Nearly 50% of the market value of listed state-owned enterprises is held by government-related entities. For every 1 percentage point increase in the dividend payout ratio, fiscal revenue can increase by 23 billion RMB;

The decline in Chinese bond yields has increased the attractiveness of immediate cash returns; domestic institutional investors reducing their equity holdings in their portfolios may have a structurally stable demand for income;

More dividend-oriented ETFs have been raised, thereby increasing the demand for high-yield stocks