Global investment banks and asset managers have expressed cautious optimism that China's A-share market is poised for a rebound this year, after underperforming major global peers in 2023.
Attractive valuations, improving corporate earnings amid stepped-up policy support and the potential for subdued investor sentiment to recover have all suggested room for a rally, they said.
Following the benchmark CSI 300 Index declining for three consecutive years and losing 11.38 percent in 2023, Goldman Sachs now projects a 19 percent price return for the index this year, staying overweight on A shares and positive on sectors like retail, media, entertainment and tech hardware.
The United States investment bank said in a report that the anticipated gains hinge on projections that Chinese listed companies could see profit growth of approximately 8 to 10 percent in 2024, a critical factor for valuations to reach a bottom.
Recent market corrections have sent the price-to-earnings ratio of the CSI 300 Index, a key gauge of valuation, to the lowest level since the end of 2018 at 10.5, compared with the 10-year average of 12.51, according to market tracker Wind Info.
"We think the worst is over and we have started to turn optimistic," said Meng Lei, China equity strategist at UBS Securities, adding that the A-share market might have been mispriced amid investor pessimism.
Corporate earnings seem to have bottomed out and picked up since the third quarter of 2023, Meng said. This trend is likely to be sustained this year as nominal GDP growth speeds up amid recovering inflation and potential policy support, including further cuts in the reserve requirement ratio and interest rates, an expanded fiscal deficit and more property sector easing.
Policymakers have continuously signaled their commitment to stabilizing economic growth and bolstering investor confidence. The China Securities Regulatory Commission vowed on Friday to rationally handle new stock issuance to foster balanced growth between primary and secondary stock markets, after the People's Bank of China, the country's central bank, injected 350 billion yuan ($48.8 billion) into affordable housing and other real estate projects to stimulate investment.
Chen Dong, chief Asia strategist and head of Asia research at Pictet Wealth Management, said the Swiss company remains tactically positive on Chinese equities over the short to medium term as China's economic recovery, although bumpy, could lead to an improvement in corporate earnings and investor sentiment in 2024.
China is set to unveil its 2023 GDP growth on Wednesday, which is widely expected to come in at slightly above 5 percent in real terms. For 2024, Chen said stimulus measures should help the economy gain momentum and achieve real GDP growth of 4.7 percent.
Despite the more optimistic forecasts, as of Friday, foreign capital still registered a net outflow of 7.96 billion yuan from A shares since the beginning of the year, via northbound trading of the stock connect programs between the Chinese mainland and Hong Kong exchanges.
With the outflow indicating that investors are still adopting a wait-and-see approach amid lingering uncertainties, the A-share market declined for two weeks in a row since the new year, with the CSI 300 Index ending Friday's trading at 3,284.17 points, down 1.35 percent from a week earlier.
"2024 would be a year abundant with both opportunities and challenges for Chinese equities," said Desmond Kuang, chief investment officer for China at HSBC Global Private Banking and Wealth.
Adopting a neutral stance on A shares, Kuang said factors including global election activities, uncertainties surrounding China's exports and high savings propensity among Chinese households could limit market performance, though policy support and signs of improving China-US relations could offer a cushion.
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