(Bloomberg) — Go tactical on Chinese stocks as global markets get roiled by the Ukraine-Russia crisis, said Goldman Sachs Group Inc. strategists, who are maintaining an overweight call.
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Focus on companies that benefit from China’s “Common Prosperity” campaign and those such as liquor giant Kweichow Moutai Co., which held up well during previous global crises, strategists including Kinger Lau wrote in a Friday note. While Chinese stocks are better positioned than others to withstand a global selloff, they are “unlikely to be immune,” they said.
China’s benchmark CSI 300 Index lost 1.3% in the past week compared while the MSCI Emerging Markets Index dropped around 4.5%. Part of that strength stems from Chinese firms’ being less reliant on external demand and having low foreign ownership, though the current turmoil warrants a “targeted approach” on China as global risks abound, according to Goldman Sachs.
“Geopolitical uncertainties and market gyrations are unlikely to impact the strategic aspiration of China to pursue” its Common Prosperity agenda, the strategists wrote. “We retain our strategic optimism on China A as we believe it is an asset class that is too big, too growthy, and too vibrant to ignore.”
Firms listed in the CSI 300 Index have just 8% of revenues linked to external demand and foreign ownership is at 4.5%, according to Goldman Sachs. Low valuations are another downside buffer, they said.
The brokerage has touted opportunities in Chinese stocks since late last year, citing attractive valuations and continued policy stimulus. While maintaining its overweight rating on China A-shares, the strategists cited risks including China’s growing trade links with Russia as well as higher inflation levels that undermine corporate profitability.
Hedges against geopolitical tensions include China’s defense and oil stocks, the strategists said. For the latter, valuations have only priced in a Brent crude price of $60 per barrel, which is more than 40% lower compared to current levels.
(Updates throughout)
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