Due to weak earnings growth and a possible consensus drop, Goldman Sachs Group Inc. downgraded its rating on China equities that are traded in Hong Kong. Citing the strategic appeal of the Indian market, the bank upgraded its shares, according to report by Bloomberg.
The investment bank reduced the weight of Chinese companies listed in Hong Kong to market-weight, while Hong Kong firms were downgraded to underweight.
“With valuations generally at fair levels relative to the macro backdrop, we expect earnings to be the main driver of returns,” strategists including Timothy Moe wrote in a note to Bloomberg, referring to Asia markets.
Due to the country's stock market's pessimism, the Wall Street bank has reduced its views on China equities multiple times this year. In August, it lowered the 12-month index objective to 67 from 70 and the full-year earnings-per-share growth estimate for the MSCI China Index to 11 per cent from 14 per cent. Since then, the gauge has dropped by almost 3 per cent.
Goldman is still optimistic about onshore Chinese shares. Artificial intelligence and new infrastructure, two industries linked to China's rebalance towards areas of higher productivity and more self-sufficiency, may do well in the long run, they suggested.
“These ‘alpha’ opportunities, which are more widely present in the onshore market, counterbalance the structural challenges of slowing growth stemming from the housing sector downturn, high debt levels, and adverse demographics,” the strategists wrote.
In the meanwhile, Goldman predicts that over the next two years, India will have "the best structural growth prospects in the region," with mid-teens earnings growth.
The market provides investors a wide range of alpha-generating themes, such as make-in-India, large cap compounders, and mid-cap multibaggers, thanks to its strategic appeal, especially considering its growth that has been primarily driven domestically, they added.