China stocks could rise up to 24% by the end of 2023, according to Goldman Sachs

Goldman Sachs said in a Monday note that the market will gradually shift from reopening to recovery.

By Friday’s close, the MSCI China index had lost about 8% since its peak on Jan. 27. That puts it close to correction territory, where an index falls more than 10% from its most recent peak.

A shift from “reopening to recovery” is expected to drive Chinese stocks higher by the end of this year by as much as 24%.

A Monday note by the firm predicts a 24% upside to the MSCI China index as it moves from its stringent zero-Covid policies to a growth phase.

According to Goldman Sachs strategists including chief China equity strategist Kinger Lau, “the primary theme in the stock market will gradually shift from reopening to recovery, with the driver of potential gains likely rotating from multiple expansion to earnings growth/delivery.”

Early this year, Chinese stocks entered bull market territory – with the MSCI China index peaking at the end of January, up nearly 60% from October’s lows.

According to Friday’s close, the index had lost about 8% since its peak on Jan. 27. That puts it close to market correction territory, which occurs when an index falls by more than 10% since its peak.

Goldman Sachs in July cut its earnings forecast for the MSCI China index to zero growth. The index tracks more than 700 China stocks listed worldwide, including Tencent, BYD, and Industrial and Commercial Bank of China.

As in a typical equity cycle, these moves will “resemble a transition from Hope to Growth,” they wrote, adding that Covid is now “arguably in the rear view mirror,” in China.

“The latest purchasing manufacturer’s index and consumption levels show clear signs of activity normalization, albeit from a low base,” the strategists wrote.

China’s economy is expected to grow by 5.5% in 2023, driven by 9% and 7% growth in the second and third quarters, respectively, according to Goldman Sachs.

“The growth impulse should be heavily tilted toward the consumer economy, where services are still operating significantly below pre-pandemic levels,” they wrote, highlighting Chinese households’ surplus savings of more than 3 trillion yuan ($437 billion) in 2019.

According to the strategists, professional speculators are showing a greater appetite for Chinese stocks.

According to GS Prime Brokerage, hedge fund investors have substantially re-risked their investments in Chinese stocks, primarily in offshore equities, with their net exposures to China almost returning to all-time highs.