Goldman Sachs Global Roadshow Feedback: The Chinese stock market returns to investors' attention, the A/H share choice, technology vs consumption is the hottest topic

DeepSeek's emergence has ignited market enthusiasm, with record inflows from hedge funds and southbound capital... Since the beginning of this year, the Chinese stock market has significantly increased its global attention, achieving an impressive performance with approximately a 20% increase.

Goldman Sachs held multiple roadshows with investors from Asia, the United States, and Europe to widely discuss views and thoughts on the Chinese stock market, and on the 26th, released a report titled "Global Market Feedback: China Back in Focus," summarizing client feedback, common questions, and its latest market perspectives.

In the report, Goldman Sachs pointed out that the emergence of DeepSeek has changed the narrative around Chinese tech stocks, and with the government's supportive attitude towards private enterprises, global investors are showing heightened interest in the Chinese stock market, with global capital returning to China.

Goldman Sachs believes that this rise is more sustainable than previous ones, but cautions about the risk of profit-taking in the coming weeks.

At the same time, Goldman Sachs addressed several common questions in the report, such as "Should we choose A-shares or H-shares? Will tech stocks continue to lead, or will consumer stocks take over?" Additionally, different types of investors have varying views on the Chinese market.

I. Chinese Stock Market Back in Focus, Investor Interest Soars

After the Lunar New Year holiday, the Chinese stock market has re-entered the spotlight for investors.

Goldman Sachs' report noted that due to strong performance, the emergence of DeepSeek, and the supportive attitude towards private enterprises, global investors are increasingly interested in the Chinese stock market.

Strong Performance: Global investor interest in the Chinese stock market has reached its highest level since the market peak in early 2021. Year-to-date, the MSCI China Index and the Hang Seng Tech Index have risen by 16% and 23%, respectively, significantly outperforming global developed and emerging markets, with stocks in developed and emerging markets (excluding China) at the 98th and 94th percentiles of the past 10 years.

New Growth Drivers from AI: The emergence of DeepSeek has changed the narrative around Chinese tech stocks, sparking innovation-driven optimism.

Supportive Attitude Towards Private Enterprises: Investors generally view the private enterprise symposium as a positive signal.

Global Capital Seeking Diversification: Global equity allocation funds are actively seeking investment options outside the U.S. stock market, with China becoming a potential destination for capital inflows due to its liquidity, valuation, and diversification advantages.

II. Positive Outlook on Fundamentals, but Short-Term Risks Remain

Despite the recent strong market performance, investors express concerns about the sustainability of this rise.

Goldman Sachs believes that fundamentally, this rise is more sustainable than previous ones (at the end of 2022 and last September).

Over the past six weeks, market earnings expectations for both the overall market and tech stocks have been raised by 1% and 2%, respectively. In its 2025 outlook released in November 2024, Goldman Sachs set a 12-month target of 75 points for the MSCI China Index, expecting a 15% upside. Based on the upward potential brought by AI, Goldman Sachs raised the target to 85 points five weeks ago, which is 19% higher than the current levelHowever, short-term risks remain, and attention should be paid to the risk of profit-taking in the market over the next few weeks, as well as the uncertainties in global geopolitical and trade patterns that add to market risks.

III. Investors Relatively Calm About Tariff Risks

In the past three months, Trump's "tariff storm" has stirred global markets, but the Chinese stock market has remained resilient.

According to CCTV News on February 27, U.S. President Trump stated in a cabinet meeting that the U.S. will impose a 25% tariff on goods imported from Mexico and non-energy goods imported from Canada starting April 2.

According to CCTV News on March 10, President Trump mentioned in an interview that some tariffs may be raised after April 2 over time.

Goldman Sachs believes that investors are relatively calm about tariff risks, which may be due to three key reasons:

China's Proper Response Measures: Due to the reduction in China's direct exports to the U.S. and the continuous improvement in product competitiveness, the sensitivity of the Chinese economy to U.S. tariff impacts has decreased, and the stability of the RMB exchange rate has further boosted market confidence.

Market Has Digested Tariff Expectations: The magnitude of the tariff increases threatened by Trump aligns with the basic expectations of Goldman Sachs economists and market expectations, and there is also a possibility of tariff increases on other trade partners of the U.S.

Finally, investors are betting that both China and the U.S. may reach a comprehensive agreement in the coming months, ultimately leading to tariff reductions rather than continued escalation.

IV. AI Reshaping Market Landscape, Profit Growth is Key

Since the launch of the DeepSeek R1 model, the average price-to-earnings ratio of China's top ten technology companies has risen to 23 times, and their market capitalization has increased by over $6 trillion. As the Nasdaq index has fallen 9% from recent highs, the valuation discount of Chinese tech companies relative to their U.S. counterparts has shrunk from 44% at the beginning of the year to the current 26%Goldman Sachs economists predict that the emergence of DeepSeek is key to changing the landscape of the Chinese stock market.

Macroeconomic level: Artificial intelligence will begin to enhance China's potential growth starting in 2026, contributing 0.2-0.3 percentage points to GDP growth annually by 2030.

Stock market impact: It is expected that in the next decade, the widespread application of AI will drive annual profit growth for Chinese companies by 2.5% through cost reduction, efficiency improvement, and the creation of new revenue opportunities, and will increase the fair/equilibrium valuation of the Chinese stock market by 15%-20%, potentially bringing in over $200 billion in portfolio inflows.

Additionally, Goldman Sachs stated that as the market digests the optimism surrounding AI, investors are beginning to focus on the extent of profit growth and profitability improvements brought by AI-related investments, as well as the creation and monetization of use cases, and their long-term impacts on the economy and labor market.

V. Supporting the private economy, corporate confidence gradually strengthens

Goldman Sachs' report pointed out that the government's convening of a symposium for private enterprises and its supportive attitude towards the private economy have gradually strengthened corporate confidence.

• Positive impact on private enterprises: It is expected that publicly listed private enterprises (POEs) will regain leading profit growth.
• Strengthened corporate confidence: Although changes in corporate confidence take time, internet companies have increased their capital expenditure budgets on AI-related investments in the upcoming earnings release season.

Furthermore, Goldman Sachs noted that investors are using high-frequency indicators such as the Corporate Purchasing Managers' Index (EPMI), corporate loans, and hiring data as measures of the enhancement of "animal spirits" in the business community.

VI. Traditional economy shows "green shoots," policy execution is key

In addition to structural growth opportunities in the technology sector, investors are also paying close attention to several "green shoots" in the traditional economy.

Goldman Sachs highlighted two aspects:

• Real estate market: The transaction volume in first-tier cities seems to have bottomed out, thanks to declining mortgage rates, rising rental yields, and supportive real estate policies.
• Construction industry: Excavator sales (often seen as a barometer for the infrastructure and construction sectors) surged in the past two months, and demand for construction materials has also increased, benefiting from ongoing demand-side policy stimulus, government-led supply rationalization, and consolidation.

Meanwhile, as corporate confidence is recovering and credit growth momentum is strong, Goldman Sachs economists have raised their GDP growth forecasts for the first quarter and the entire year. Goldman Sachs also stated that policy execution is key, and good execution is crucial for supporting further rises in the stock market.

VII. Global funds return to China

Goldman Sachs' report also pointed out that hedge funds and southbound funds have been active in the recent market rebound, and emerging market and Asia-oriented investors in mutual funds have increased their allocations to China in the past few months.

• Global hedge funds have increased both their net and total exposure to Chinese stocks, while southbound funds flowing into Hong Kong stocks have reached record levels. However, some global funds remain cautious about increasing their allocations to China.

VIII. The most common question among investors: A-shares or H-shares?

Goldman Sachs' report also pointed out that a frequently asked question from investors is: Should they choose H-shares or A-shares?

• Relative performance: Over the past three months, H-shares (MSCI China) have outperformed A-shares by 16 percentage points, which is equivalent to the 99th percentile and 2.4 standard deviations within the range of H-A relative returns over the past 10 years. Goldman Sachs' A-H rotation model indicates that A-shares may slightly outperform H-shares in the next three months.
• A-shares or H-shares: Investors focused on absolute returns typically tend to tactically shift towards A-shares, as the AI-driven rebound has pushed H-shares towards more normal valuations, and the A-H premium has compressed. From a portfolio construction perspective, Goldman Sachs recommends that investors continue to build core positions around mid-to-late cycle AI beneficiaries in H-shares, while seeking alpha opportunities in selected consumer and cyclical sectors within A-shares.

9. Will tech stocks continue to lead, or will consumer stocks take over?

Goldman Sachs' report also noted that investors are paying attention to whether tech stocks can continue to outperform the market, or if consumer stocks will take over. If the largest 10 internet and AI tech companies are excluded from the benchmark index, the MSCI China Index has only risen 7% year-to-date.

• Industry concentration: The industry concentration in the Chinese stock market is not uncommon; in 2015 and 2018, the top ten stocks accounted for as much as 40% of the index. In the U.S. market, the top seven tech stocks (Magnificent Seven) accounted for 33% of the S&P 500 index two months ago.
• Advantages of tech stocks: From a bottom-up perspective, the total earnings weight of AI tech leaders remains relatively low in the overall market, and the winner-takes-all nature of competition in technology also indicates that the potential for leaders to expand their advantages still exists.
• Conditions for sector rotation: According to Goldman Sachs, the necessary conditions for a comprehensive rotation from tech stocks to non-tech stocks include broad economic recovery, stability in the national real estate market, and clear signs of reflation, all of which are more likely to occur later this year or early next year. Before that, Goldman Sachs will continue to prefer thematic alpha over general industry beta in the consumer economy and cyclical sectors.

10. Different types of investors' views on the Chinese market

Different types of investors have varying views on the Chinese market, and Goldman Sachs analyzed this from the perspective of five major types of investors:

• Asset allocators: Over the past few years, most Asian investors have increased their holdings in Japanese, Korean, and Indian stocks. Now, they are actively considering re-entering the public market, although some still heavily rely on China's private equity market, with a focus on technology (including electric vehicles) and consumer stocks.
• Global hedge funds: Hedge funds have increased their net exposure to Chinese stocks, primarily focusing on tech stocks in the ADR and Hong Kong markets, as well as specific AI supply chains (humanoid robots, low-altitude economy), infrastructure, and materials cyclical stocks.
• Long-term funds: Global funds mainly focus on index-weighted stocks in the offshore tech sector and state-owned enterprises with high dividend payouts, as well as defense themes in Europe and AsiaEmerging market and regional funds are studying certain policy beneficiaries in the consumer economy, particularly those companies affected by trade-in programs for consumer goods, childcare subsidies, and local government spending.
• Derivative investors/traders: Following a strong rally in the Hong Kong stock market, there has been increased interest in profit-taking and/or downside protection, especially concerning offshore tech stocks. The excess return trading around small-cap stocks in the A-shares market, as well as their financing value, continues to resonate with many investors.
• Quantitative funds: With clearer regulations on onshore trading and the gradual recovery of fund flows into structured products from the chaos of early 2024, global quantitative investors remain active in China. Onshore quantitative funds have begun to expand overseas to achieve risk diversification and gain easier access to financing and markets