The Shanghai Shenzhen CSI 300 Index of A-share stocks “would give approximately 50% and 15% potential upside from current levels if retail optimism were to return to its peak in 2015 and 2018 respectively,” Goldman strategists led by Kinger Lau wrote in a report Sunday.
They cited improving risk sentiment and lack of investor participation in the earlier rally as fuel for further gains.
The CSI 300 rose 28% from the end of 2018 through March 6, becoming the world’s best trade in February, before retreating a total of 5% as investors worried that Beijing wanted the surge to slow down. The index and other major China stock gauges are still beating most global equity benchmarks.
Goldman said its conversations with clients in recent weeks have focused on comparisons with peaks of market optimism in June 2015 and January 2018.
Risk appetite for Chinese stocks has improved “dramatically” amid rising expectations of a trade deal with the US, potential for further inflows to China A shares after MSCI Inc.’s announcement it would boost their weighting in its indexes, a clear shift to policy easing bias and a pro-market tone from senior policymakers, Goldman said.
Goldman further said that many investors haven’t fully participated in the rally. Local institutional investors had relatively high levels of cash to start the year, equity-focused mutual funds have been lagging the market, global active mandates are extremely underweight. The MSCI China Index and emerging-market and Asia ex-Japan funds are behind the new benchmark weight on China A shares.
“Benchmark and performance pressures have created a sense of a fear of missing out’ among domestic investors,” the Goldman strategists wrote.
“Upside optionality on retail optimism” is “attractively priced in the current valuations.” The strategists added.
That isn’t to say that it will be a smooth path upward. Goldman sees a risk of further near-term profit-taking after the quick rally that started the year, especially if macro data releases continue to be soft, earnings surprise to the downside and the MSCI announcement of increased index inclusion or a US-China trade deal spur sell-on-the-news declines.
Most investors Goldman spoke to saw a 5-10% “retracement from the recent highs as a sensible level to re-engage,” according to the report.
The historical analogies can be tricky, of course. Retail investors accounted for 82% of A-share turnover in 2017, and it’s difficult to predict their investment behavior, wrote Goldman. Still, the combination of expected bullish events and investors trying to jump on board means that there should be lots of room for a rally, according to the bank.