Foreign investment banks believe that the continuous implementation of fiscal policy will support economic growth, and against this backdrop, corporate earnings are expected to rebound, making the upward repair of stock market valuations worth looking forward to.

The A-share market at the beginning of 2024 has been volatile, and the market's expectations for the future trend of A-shares are filled with cautious sentiment. How do major foreign investment banks with different perspectives view A-shares?

The majority of foreign investors believe that China's economy will continue to recover in the new year, playing an important role in driving the world economy, and they look forward to the continuous implementation of fiscal policy in the new year to support economic growth. Against this backdrop, corporate earnings are expected to rebound, and the upward repair of stock market valuations is worth looking forward to.

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Specifically, UBS strategy analyst Wang Zonghao believes that in 2024, the financial sector of A-shares will maintain steady earnings growth under the improvement of capital market sentiment, and the non-financial sector is also expected to see a significant rebound in profit growth driven by policy benefits and macroeconomic recovery. "The most difficult time may have passed, it's time to turn optimistic."

Policy intensity is expected to be strengthened.

The A-share market in 2023 was not optimistic, and the downturn continued into the beginning of 2024. Foreign banks believe that in the new year, it is necessary to drive the macroeconomy through the continuous implementation of fiscal policy, expand total demand, boost investor expectations, and lead the market valuation to repair upward.

In the current low inflation context, there is still room for policy to take effect. Jing Shun Group's Chief Investment Officer, Ma Lei, believes that the issuance of one trillion yuan in special treasury bonds last year increased the fiscal deficit as a percentage of GDP from 3% to 3.8%, marking a historic increase; it is expected that in the new year, the government will still focus on improving China's economy and financial markets to enhance positive market sentiment. Fidelity Group's Head of Asia-Pacific Equities, Martin Dropkin, also expects that macroeconomic regulation in 2024 will focus on fiscal and monetary policy to ensure economic growth is on the right track. In terms of specific directions, BlackRock's Chief China Economist, Song Yu, believes that the current low inflation level and high real interest rates may lead to policy adjustments towards lowering interest rates; at the same time, there is also room for further encouragement measures in the automotive and real estate sectors.

Under the premise of policy support, Fidelity Group believes that China's economic growth in 2024 will reach 4% to 5%. Goldman Sachs also holds an optimistic attitude, expecting the real GDP growth rate to be 4.8%. BlackRock's Song Yu added that the core growth points of the future economy lie in the advancement of high-end technology, low carbon, and the improvement of mass consumption; the silver economy, as well as service industries including personal health care and personal medical services, may also see greater development.

Some foreign investors also maintain a cautious and conservative attitude towards the macroeconomy next year. Morgan Stanley's Chief Economist for China, Xing Ziqiang, expects China's real GDP growth in 2024 to be slightly greater than 4%. This forecast is significantly lower than market expectations, and the decisive factor also lies in the intensity of policy. He added that China is currently facing significant deflationary pressure, affecting corporate earnings and market asset valuations, but the current policy has underestimated the urgency of solving the deflation problem and still needs to make greater adjustments.Anticipate Corporate Profit Recovery

Currently, China's capital market is at a valuation trough, and there is a consensus among many foreign investors that corporate earnings will rebound in the new year for A-shares.

Goldman Sachs' Chief China Equity Strategist, Liu Jingjin, estimates that the MSCI China Index and the CSI 300 Index constituents will achieve earnings growth of 10% and 11% respectively in 2024. This is the result of the combined effects of several factors: the current valuations are generally under pressure, and the active response of policies will push the return distribution to the right in 2024; at the same time, it is expected that the decline in real estate sales in 2024 will be better than last year, and its drag on earnings will also weaken.

BlackRock's Chief Investment Officer, Lu Wenjie, also believes that with the support of policies, China's economy will recover moderately, and the profits of excellent companies are expected to be repaired; among them, companies with overseas expansion logic will also show growth highlights in the global macro environment next year.

UBS strategist Wang Zonghao believes that the current static P/E ratio of the CSI 300 Index is close to the lows of 2016, 2018, and 2022. However, considering that the main economic indicators have shown signs of bottoming out and rebounding, and macroeconomic easing policies continue to intensify, this low valuation level is not reasonable. Looking forward to 2024, the MSCI China Index may have an upward space of about 15%, with earnings growth of 10%. At the same time, the recovery of revenue growth and the improvement of profit margins in downstream industries are expected to drive the earnings per share growth of the A-share CSI 300 Index, with an estimated year-on-year increase of 8% in the earnings per share of the A-share CSI 300 Index in 2024.

Wang Zonghao added that the key catalysts for the upward repair of profits are mainly three: first, with the help of a small release of excess savings, China's consumption and service industries may continue the post-pandemic recovery trend in 2024; second, the current national fiscal approach is to use more explicit fiscal support to stabilize growth, which is expected to enhance investors' expectations for the economy and policies, thereby repairing valuations; third, the trend of the return of northbound capital, although the proportion of northbound capital's holdings and trading volume in A-shares is not high, the high-frequency disclosure will have a greater impact on the expectations of domestic investors. At the same time, once the "smart money" from overseas begins to net inflow, the risk preference of onshore investors will also be enhanced, forming a positive feedback loop, which will continuously benefit the A-share market.

Which industries are worth looking forward to?

In specific areas, strategists at J.P. Morgan Asset Management believe that although the P/E ratios of communication services, non-essential consumer goods companies, and many leading technology companies are currently lower than the average level of 2015, they are expected to achieve sustained earnings growth in 2024.

Goldman Sachs' Liu Jingjin added that mass-market consumer stocks, some export companies, artificial intelligence, new infrastructure, "little giants" (growth-stage specialized and new small enterprises with good performance, development potential, and cultivation value), and companies leading in corporate governance will also perform well with the rebalancing of China's economy and are worth investing attention.

With the recovery of consumption after the epidemic, many foreign investors believe that the change in consumer behavior will bring opportunities to A-shares and are optimistic about the development of consumer stocks.UBS Evidence Lab's "Consumer Survey on Market Expansion in China's Lower-tier Cities" conducted in June 2023 found that residents of lower-tier cities have a strong inclination towards consumption upgrading. This indicates that a significant portion of this group has withstood the economic impact of the pandemic, and consumption recovery has already begun. Fidelity's Martin Dropkin also believes that the substantial excess savings accumulated during the pandemic have led to stronger household spending, a trend that will be beneficial for the performance of consumer stocks. Jing Shun Investment's Ma Lei added that the consumption of the middle class is on the rise, and changes in consumer behavior will also bring excellent investment opportunities in the next 5 to 10 years, especially in the fields of renewable energy, electric vehicles, and batteries.

Goldman Sachs' Liu Jingjin added that the profit growth of the internet sector is also expected to be positive. At the same time, thanks to further cost optimization and improved monetization capabilities, the profits of TMT (Technology, Media, Telecommunications) companies are expected to grow by an additional 13% on the 2023 basis. In addition, with the support of global inventory replenishment and unique product cycles, the technology hardware industry is also expected to reverse the downward trend in 2024.