Goldman Sachs expects the MSCI China Index to rise by 20% this year, with net inflows from southbound funds reaching USD 200 billion

Goldman Sachs published a research report indicating that it expects the MSCI China Index and the CSI 300 Index to rise by 20% and 12% respectively this year, maintaining an "overweight" rating on A-shares and H-shares. The bank believes that this year's stock market gains will be entirely driven by earnings growth; supported by AI, the "going out" strategy, and anti-involution policies, earnings growth is expected to accelerate from 4% in 2025 to 14% in 2026 and 2027. Currently, market valuations are reasonable, and the monetization of AI, policy stimulus, and liquidity exceeding expectations will bring upward potential.

In terms of liquidity, the bank predicts that net inflows from southbound funds could reach $200 billion (approximately HKD 1.558 trillion, compared to a net inflow of RMB 1.4 trillion in 2025), setting a new historical high; the flow of funds for domestic asset reallocation may accelerate, potentially bringing about RMB 3 trillion in incremental funds to the stock market; the total amount of dividends and share buybacks this year may approach RMB 4 trillion; long-term foreign investors may reduce their selling of Chinese stocks, implying a potential buying scale of about $10 billion (approximately HKD 77.9 billion); and the amount raised by new shares this year may exceed $100 billion (approximately HKD 779 billion), an 80% year-on-year increase, equivalent to 0.5% of the current market capitalization.

The bank noted that retail investors in mainland China are still quite far from their optimal efficiency frontier, with real estate/cash accounting for 54% and 28% of asset allocation, while stocks only account for 11%. With real interest rates declining and the high expected returns from stocks, tens of thousands of dollars may flow from cash into the stock market. Continuous disposable income and financial capital growth also mean that over RMB 14 trillion in "new funds" will seek investment opportunities each year.

In terms of sectors, the bank remains optimistic about the AI theme, upgrading the hardware sector rating to "overweight," consistent with the internet sector. In the consumer sector, it still prefers services over goods, while focusing on the materials industry and maintaining an "overweight" rating for the insurance sector.

Goldman Sachs expects China's GDP to grow by 5%, 4.8%, and 4.7% year-on-year from 2025 to 2027, with CPI expected to remain flat, at 0.6%, and 0.9% year-on-year from 2025 to 2027, and PPI expected to decline by 2.6%, 0.7%, and rise by 0.3% year-on-year from 2025 to 2027. It expects the USD to RMB exchange rates to be 6.85 and 6.54 in 2026 and 2027 respectively