Global capital is going crazy "sweeping goods", how much room for growth is left in the Chinese stock market?

The People's Bank of China's series of "nuclear-level" monetary policies have completely ignited the Chinese stock market.

Throughout September, both the A-share Shanghai Composite Index and the Hang Seng Index in Hong Kong surged by more than 17%. During the "Golden Week" National Day holiday in October, while the A-share market was closed, global capital continued to frenzy "sweep goods". Last week, the Hang Seng Index soared by 10.2% to a two-and-a-half-year high, while the Nasdaq Golden Dragon Index in the US also rose by nearly 12%.

The higher you climb, the colder it gets. Currently, the most pressing question for investors is how long this bull market can last? Where is the finish line? And which assets are worth paying attention to?

Hang Seng Index Aims for 33,000 Points, Shanghai and Shenzhen 300 Expected to Return to 5,500 Points?

Wall Street generally believes that after the People's Bank of China's monetary policy "big gift package" landed, a large-scale stimulative fiscal policy is "waiting to be released". Coupled with the fact that retail investors are rushing into the market emotionally, there is still significant room for a substantial rise in the Chinese stock market.

On October 5th, Goldman Sachs raised its rating on the Chinese stock market to "overweight" in its latest report, expecting a further increase of 15-20%. Goldman Sachs raised the target price for MSCI China from 66 to 84, and for the Shanghai and Shenzhen 300 Index from 4000 to 4600.

In its latest research report, Morgan Stanley estimates that if retail investors continue to maintain optimistic sentiment, up to 2-3 trillion RMB of Chinese household financial assets will be reallocated to the stock market](https://wallstreetcn.com/articles/3729574). The institution divides the rebound of the Chinese stock market into three stages:

Stage One: A preliminary 15% increase, which the market has already completed;

Stage Two: Expected to have a 12% growth potential, driven by global investors' optimism towards the Chinese market and diversified asset allocation;

Stage Three: It is necessary to see corporate profit growth, improvement in debt conditions, and effective implementation of government fiscal stimulus policies.

Deutsche Bank, on the other hand, warns that "if you give up on this rebound, you will bear the consequences". In its research report released last week, the bank pointed out that although the market may be overbought in the short term, investors should continue to increase their holdings of Chinese stocks. The bank predicts that by as early as 2025, the Hang Seng Index and the Shanghai and Shenzhen 300 Index will return to historical peaks of 33,000 points and 5,500 points respectively, representing a potential upside of 42.9% and 36.9% from current levels.

Over the past two years, we have repeatedly stated that we are particularly bullish on the Hang Seng Index, expecting it to surpass its previous peak of 33,000 points during the upward cycle, while the Shanghai and Shenzhen 300 Index will retest 5,500 points. Our main question is how long this will take, according to the table below, possibly as early as 2025

Opportunities still exist in the major financial sector, securities stocks are expected to continue to lead the bull market

JP Morgan believes that Chinese financial stocks, despite experiencing several rounds of significant gains, still appear to be undervalued. An analyst team led by Katherine Lei released a report last week stating that Chinese financial stocks as a whole are trading at a 39% discount to the price-to-book (PB) ratio peak of 2020/2021, and a 65% discount compared to the peak of 2015.

Within the financial sector, JP Morgan's preference order is securities firms (A/H shares) > life insurance (H shares) > growth-oriented banks (A/H shares) > life insurance (A shares) and property insurance (A/H shares) > state-owned enterprise banks (A/H shares).

In other words, JP Morgan believes that securities stocks have the greatest upside potential, while state-owned enterprise banks have the smallest upside potential. The institution stated:

Securities firms have the highest beta coefficient in the Chinese banking industry, and their earnings should benefit from the increase in margin trading and average daily trading volume (ADT). Our sensitivity analysis shows that in an optimistic scenario, the earnings per share (EPS) of securities firms could increase by 37%, and the return on equity (ROE) could reach around 12.1% (compared to the current Bloomberg consensus estimate of about 7.1%).

Similarly, Morgan Stanley is also bullish on securities stocks, with its latest research report stating that if investors consider the recent high average daily trading volume as the norm, securities stocks may experience a short-term surge.

If the momentum is strong enough, we believe that retail investors may consider the 2 trillion RMB (ADT of A shares in the two days before the market closed) as the operating rate, which could further increase (securities stocks) earnings by 30%, with ROE reaching around 13%.

Goldman Sachs has upgraded insurance and other financial sectors (such as securities, exchanges, and investment companies) to "overweight," expecting increased capital market activities and continued improvement in asset performance.

When will the rebound in real estate stocks end?

JP Morgan's research report last week pointed out that the recent rebound in Chinese real estate stocks is mainly driven by market sentiment, with investors expecting larger-scale fiscal stimulus policies and hoping for a stabilization in the political situation The report pointed out that the price-to-earnings ratio (P/E) of state-owned real estate companies is 7.9 times, which has returned to the mid-term level before 2018. The price-to-book ratio (P/B) of state-owned real estate companies is 0.68 times, while private enterprises are at 0.56 times. These valuation levels seem to have already reflected a similar market environment before 2020.

JP Morgan believes that if fiscal stimulus is less than expected, or if real estate sales data begin to weaken, the market may start to profit-taking.

The report also mentioned that investors should pay attention to lagging stocks in the property management sector. These stocks have relatively stable fundamentals, but their valuations have dropped from a P/E ratio of 40 times to 15 times.

Consumer stocks reach a new starting point

After the Political Bureau meeting, multiple departments and local governments have launched plans and activities to boost consumption. Citigroup believes that the main purpose of these policy changes is to stimulate consumption, which is expected to have a positive impact on consumer stocks first.

According to Citigroup's latest research report, if the government introduces new fiscal stimulus measures in the future, coupled with the positive wealth effect brought by increased liquidity in the real estate market and stock market, consumers' consumption of high-end or non-essential goods will also be boosted in the later stage.

Specifically, Citigroup's preference order for the consumer goods industry is: dairy products > beer > condiments > beauty and personal care. In the non-essential consumer goods industry, Citigroup is more optimistic about household appliances, catering, and hotels.

Internet, industrial, healthcare stocks worth watching

Morgan Stanley believes that as the Chinese stock market completes three stages of rebound, investors should focus on companies that may benefit from economic recovery, especially those with attractive valuations, large scale, and good liquidity.

Among them, large internet companies and consumer stocks may become winners of the rebound due to their sensitivity to economic growth.

We believe that large internet companies and the broad consumer goods industry are in a favorable position due to their still attractive valuations, the nature of large-cap stocks, high liquidity, and their exposure to reflation.

As companies increase investments, Morgan Stanley points out that stocks related to industrial, materials, and IT spending may also perform well. In terms of policies, any new social welfare measures, such as improvements in healthcare insurance, may have a positive impact on healthcare stocks.

In addition, Goldman Sachs has upgraded metals and mining to market weight and downgraded telecom services to underweight.

By upgrading metals and mining to market weight, increasing cyclical exposure, this adjustment is driven by measures in the Chinese real estate market and potential fiscal stimulus, as well as a hedge against geopolitical risks.

Conversely, due to its defensive nature, rising valuations, and lower sensitivity to interest rates, we have downgraded telecom services to underweight