Goldman Sachs: Expects MSCI China Index to rise 20% by the end of 2025! The release of potential policy dividends is the key to investment.

Goldman Sachs predicts that by the end of 2025, the MSCI China Index and the CSI300 Index will rise by about 20%. In terms of market returns, both A-shares and H-shares are balanced in the short term, and as tariffs and policies become clearer, sentiment and liquidity backgrounds may start to improve by the end of the first quarter of 2025. The bank believes that in 2025, attention can be focused on the potential policy dividend release, including government consumer proxies, emerging market exporters, and new technology/infrastructure proxies. In terms of investment portfolios, the bank advocates towards consumer stocks, maintaining online retail, media, and healthcare as holdings, and increasing exposure to consumer services. Industries with slightly increased relative risk include automotive, energy, materials, and transportation (newly downgraded), with a recommendation to sell. Although the new year started off poorly (with both A-shares and H-shares falling by 5%), the approximately 7-10% earnings growth rate per share, moderate potential for upward valuation, and generally low investor positions continue to indicate the attractiveness of the risk/return profile of the Chinese stock market. Strong government policy measures have been initiated to help alleviate housing and external challenges and promote the long-awaited shift in growth from trade and investment towards consumption. Goldman Sachs predicts that by the end of 2025, the MSCI China Index and the CSI300 Index will rise by about 20%. Investment themes will emerge from the policy dividend, with Goldman Sachs predicting noticeable government expenditure recovery in 2025 driven by local government debt resolution, which will help strengthen fiscal conditions and alleviate liquidity pressures on local authorities. By category, local government spending is concentrated in areas such as construction and industrial parks, transportation infrastructure, education, health, and social work, accounting for 40% of total expenditure. Although trade protectionist policies may put pressure on China's economic growth and CKH Holdings stock fair value, they may bring new investment opportunities through macro and micro channels in a dynamic world. First, due to the US increasing tariffs, the trade-weighted depreciation of the Renminbi may benefit some consumer and export-oriented industries financially and operationally. Second, companies' regionally diversified adaptive responses in income and production may enable them to gain market share in emerging markets with bilateral economic and trade relations with China that are stable or improving. Third, Chinese companies are upgrading the value chain, providing products and services that complement the growth patterns of many emerging markets. Trade and geopolitical challenges abroad may escalate and highlight China's strategic goals, such as national security, technological progress, and high-quality growth. In the stock sector, the bank believes that China's small giants may be effective tools to leverage these policy objectives because: (1) they are carefully selected emerging companies with clear policy support; (2) they are primarily in upper-end goods, (new) materials, technology hardware, and semiconductor industries, which are essential to the above policy focus and are also integral to the new infrastructure narrative; (3) in terms of market attributes, they are growth and thematic mid-cap stocks, typically favored by domestic individual investors. Industry: Focus on Chinese consumers Hold Media/Entertainment: With the escalating tensions between the US and China, short-term trading dynamics in this industry may be volatile, but it can be seen as a key indicator of resilience in Chinese consumer services, especially among the younger generation, with over 70% of revenue coming from the domestic market. GS analysts predict that the industry's revenue will achieve moderate single-digit growth by 2025, with profit margins further rising as monetization and cost control improve, supporting its potential for low double-digit profit growth. It also reflects the theme of "going global," with about 30% of revenue from major publishers coming from overseas. (Online) Retail: With new entrants scaling back expansion, the competitive landscape for large enterprises may improve. E-commerce operators are expected to achieve high single-digit profit growth in a slightly saturated market through cost optimization and reduced subsidies, and their AI scalability seems affordable, with a PE ratio below mid-term and a PE growth rate of 0.5 times. Repurchase yields are relatively high (4% over the past 12 months), providing additional cushion for valuations. Healthcare: In 2024, the industry significantly underperformed the market, falling by 21%. Valuations are at cyclical lows, and investor holdings are light. The bank is more bullish on biotechnology rather than the broader healthcare sectors such as pharmaceuticals, devices, and services. Geopolitical concerns may continue to drive fluctuations in CDMOs, while improvements in local government finances should bode well for equipment manufacturers. Brokerage: With the recovery of A-share market performance and trading volume, the brokerage sector surged in the third quarter of 2024 but has retraced 54% from its peak in October. Goldman Sachs analysts expect daily trading volume in A-shares to increase by 15% year-on-year this year, with domestic mergers and capital market activities for overseas financing becoming more active. Industry consolidation may be a key source of Alpha for the sector as the competition is intense, and profitability faces pressure. Consumer Services (New upgrade): Due to the strong performance and expanded valuations in this industry in 2024, the industry rating was downgraded from Hold to Market Weight two months ago - since then, the industry has retreated by 8%. The bank believes that fundamental strengths in industries like food delivery, travel, and education, with clearer regulation and healthier pricing trends, make them more attractive in terms of TAM growth potential compared to consumer goods, with more favorable valuations now. Sell Automotive: With government subsidies driving domestic car sales, total sales in China are expected to increase slightly to 22 million vehicles by 2025 (up 1.4% year-on-year), with new energy vehicle sales leading the way, as the market penetration rate has exceeded 50% in recent months. Profit margins for electric vehicle original equipment manufacturers have stabilized due to improved capital expenditure discipline and rationalized prices, but an increasing number of internal combustion engine manufacturers are currently operating at a loss. Despite higher import tariffs, China's global market share for electric vehicles is expected to continue to grow through 2025. The bank continues to be selective in investing in this industry, favoring companies with strong product lines, economies of scale, and clear global/EM objectives.Industry leaders in expansion and production strategies.Energy: The industry is expected to remain in a consolidation phase for most of 2024, with this trend expected to continue. According to GS forecasts, Brent crude prices in 2025 may trade in the range of $70-85 per barrel (currently at $78). Analysts favor upstream companies due to their relatively higher oil price beta coefficients, while refineries may continue to face demand and profit pressure. Valuations are close to mid-range, with the implied oil prices of the three oil giants being $10-20 per barrel lower than the current spot price of Brent crude. Strong (free) cash flow may mean there is moderate upside risk to their dividend and buyback policies. Materials: Demand prospects for real estate and traditional infrastructure-related metals (such as iron ore) remain weak, while electric vehicles and raw materials for renewable energy still face overcapacity issues, although the situation is improving. There may be special opportunities: copper prices may rise given the increasing green capital expenditure and potential acceleration in grid-related investments; rationalization of the supply side of the cement market and industry consolidation may drive up copper prices. Transportation (New Downgrade): Despite significant growth in freight volume, logistics companies may still face intense competition and profit pressure, while tariff issues may put pressure on pricing for shipping companies, especially as early export demand fades later this year. Airlines may benefit from further recovery in international travel, but risks may arise from a weak renminbi on the balance sheet. Other Changes Banks (upgraded to market weight): it is widely expected that government capital injections may lead to stronger loan growth and more sustainable dividend payments for banks in 2025. Net interest margins may further compress during the rate-cutting cycle (including mortgage loans), but debt swap plans and early signs of stabilization in first and second-tier city real estate may alleviate asset quality (non-performing loans) pressure. The bank prefers large banks with excess capital and larger local government debt exposure, rather than smaller banks facing higher risks of capital shortage. Insurance (downgraded to market weight): Due to soft growth in new premium income this year and suppressed domestic bond yields, the industry rating has been downgraded to market weight. Investment income did significantly increase in the third quarter of 2024 due to the rise in A-shares, leading to less favorable base effects in 2025. Overall, with ongoing downward revisions in macro growth expectations, rising global interest rates leading to downgrades in growth stock ratings, and increasing geopolitical and policy uncertainties, value stocks have continued to outperform growth stocks over the past few years. The bank believes that by 2025, factors such as domestic policy easing, US tariff implementation, and widening yield spreads between the US and China may further complicate the relative return dynamics between growth and value. After small-cap stocks outperformed large-cap stocks noticeably in the fourth quarter of 2024, the performance of small-cap stocks may tend to stabilize relative to large-cap stocks in the coming months, with the focus on the newly established CSIA500 benchmark index-driven investment strategy and the interesting small giants theme that may bring excess returns to investors.