Goldman, JPMorgan still see upside in China assets after rally

Both firms are becoming more selective after a hot start to 2019. (Bloomberg pic)

SINGAPORE: Chinese stocks have had a great start to 2019, and it may not stop there.

The benchmark CSI 300 Index has risen 25% this year, outperforming all other major stock gauges. The offshore yuan has risen more than 2% versus the US dollar.

And while Goldman Sachs and JPMorgan say some sectors are fairly valued or even expensive, they also see China-related assets where further gains are likely.

“We see room for modest multiple expansion for China,” Goldman strategists led by Timothy Moe wrote in a note Mar 2. “We estimate an average 4% further upside in offshore equities if trade news improves further. For trade-related names, we see better value in the US-exposed China stocks than the regional exporters.”

And they aren’t alone in seeing some areas that are still ripe for investment.

“We anticipate further gains, but at a slower pace and conditional on policy lifting growth and earnings expectations,” in the second half of the year, JPMorgan strategists led by John Normand wrote in a note Mar 1. “China equities are worth overweighting more than CNY, and agriculture is now a more interesting catch-up trade than base metals.”

Multiple factors have helped drive the rebound in Chinese stocks this year. Optimism increased about the US-China trade situation, while the People’s Bank of China moved to cushion the country’s economy and Beijing’s new chief securities regulator made a call to “ revere the market.” And then there was the widely-anticipated announcement last week that MSCI would boost the weighting of mainland-listed shares in its indexes.

Both Goldman and JPMorgan cautioned in their reports that further strong performance in China-related assets is highly contingent on the outcome of trade talks with the US, including the details of any deal.

US-exposed China stocks that could benefit from improving news on trade include Nexteer Automotive Group, AAC Technologies and Genscript Biotech, the Goldman strategists wrote. Companies that could benefit from a strengthening renminbi include Shenzhen International Holdings and China Aoyuan, they said.

JPMorgan sees the yuan and local-currency bonds as looking expensive right now, while copper is “slightly” dear. Aluminium and soybeans look cheap, the firm said, and metals & mining stocks are undervalued along with other cyclical like tech and financials.

“Bullish momentum has yet to fade broadly,” Normand wrote.