Chinese stocks could rally 20% on full reopening, Goldman says

(Bloomberg) — Strategists at Goldman Sachs Group Inc. say a full reopening in China will send Chinese stocks up 20%, citing signs the government may be starting to prepare to ease its Covid-Zero policy after a key leadership summit.

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The increase in flights and growing adoption of an inhaled vaccine developed by CanSino Biologics Inc. are encouraging news, strategists including Kinger Lau wrote in a Sunday note. Goldman economists expect the government to start easing rules in the second quarter of 2023, the report said.

The report comes as Chinese stocks surged, with the Hang Seng China Enterprises Index on Monday extending a 9 percent advance last week as traders jumped on unverified social media posts about reopening plans. Gains largely held even as health authorities reaffirmed their commitment to Covid Zero and daily infections jumped to their highest level in more than six months.

The lifting of Covid restrictions could be “one of the most visible, long-awaited and powerful catalysts to the upside for the market,” Goldman analysts wrote. This suggests that conditions such as higher vaccination rates among the elderly, changes in official announcements to ease infection fears, they said.

Read: Chinese stocks extend rally even as Covid Zero reconfirmed

The market will pre-trade any actual reopening about a month in advance, and the positive momentum could last two to three months, Goldman strategists wrote. The domestic cyclical and consumer sectors will be the main beneficiaries, they said.

READ: What to watch for China’s potential zero Covid exit: Inventory

Goldman’s basket of renewed stocks — retailers, airlines, hotels and restaurants — has outperformed the MSCI China index by 20% since July. There is still “ample room for further assessment and fundamental recovery” if the reopening gains momentum, they wrote.

While staff from the National Health Commission said on Saturday that China would “resolutely” stick to its virus control measures in the face of increasingly serious outbreaks, analysts also pointed out that an official at the same briefing said some cities needed to adjust excessive measures. German Chancellor Olaf Scholz’s announcement that China will make BioNTech SE’s Covid-19 vaccine available to foreigners living in the country also fueled expectations that Beijing is preparing to reopen.

Last week, the Hang Seng China Enterprises Index posted its best weekly gain since 2015. The CSI 300, the benchmark for mainland shares, also jumped more than 6 percent, although it traded 0.4 percent lower on Monday.

(Updates with Monday’s moves in paragraph three, details of government briefings in paragraph seven)

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