The Chinese stock market has achieved a "summer breakthrough," and Goldman Sachs believes that in the future, it should "light on indices, heavy on individual stocks."

After a period of consolidation in June and July, the Chinese stock market has recently achieved a "summer breakthrough." The MSCI China Index has reached a four-year high, and the CSI 300 Index has also hit a year-to-date peak. However, Goldman Sachs pointed out that the valuation of the A-share market is no longer low, and the easy profit phase of simply betting on the index may have passed.

According to news from the Chasing Wind Trading Desk, a report from Goldman Sachs on July 28 stated that the key factors driving the recent rise in A-shares include: expectations of easing China-U.S. relations, strong second-quarter economic data, policy interventions targeting "involution" in key industries, the recovery of the Hong Kong IPO market, and record inflows from the "southbound trading" scheme.

Based on these positive changes, Goldman Sachs reiterated its "overweight" stance on the Chinese market and raised the 12-month target for the MSCI China Index to 90 points, indicating an 11% potential return.

However, given that the market has risen 25% since the beginning of the year, and valuations are no longer at low levels, investors should pay more attention to stock selection (Alpha) rather than a broad market rally (Beta). Goldman Sachs has shifted its strategic focus to sectors such as insurance and materials, while also recommending attention to China's leading private enterprises (Prominent 10) and shareholder returns as two major themes.

Why "light on index, heavy on stocks"?

In the report, Goldman Sachs repeatedly emphasized its preference for "Alpha over Beta," suggesting that investors should "lighten the index and focus on individual stocks" in the future. There are two main reasons behind this:

First, valuation recovery makes the market more sensitive to risks.

The report clearly states that the significant rebound of 25% year-to-date has pushed the 12-month forward price-to-earnings ratio of the MSCI China Index to 12.7 times, which is within the "normalization" range (0.2 standard deviations), no longer in the previously suppressed state. This means the market is more susceptible to external shocks, domestic growth, or policy disappointments.

Additionally, August and September are typically months of seasonal weakness for A-shares, with average/median returns of -1% and -5% respectively over the past decade. In this context, simply investing in the index (Beta) may face greater volatility.

Second, structural opportunities are abundant, and selective stocks can generate excess returns (Alpha).

The market differentiation has created conditions for active stock selection. Goldman Sachs believes that seeking investment opportunities between A-shares and H-shares is not a "black or white" choice; both markets offer unique value propositions. Goldman Sachs has made specific adjustments to industry allocations:

• Increase holdings in insurance and materials sectors: Convert positions in bank stocks to increase holdings in insurance stocks, as they have relatively attractive valuations and can benefit indirectly from the stock market rise. At the same time, the materials sector rating has been raised to "overweight" to capture potential opportunities from "anti-involution" policies.
• Downgrade banks and real estate sectors: Remove bank stocks from the overweight list and downgrade the real estate sector to a "neutral" rating.

Goldman Sachs is optimistic about two major investment themes in the future

One is the Chinese private "Ten Giants" (Prominent 10), modeled after the "Tech Giants" in the U.S. stock market, referring to ten private enterprises with the potential to enhance their dominant positions in the stock market, with the latest list including CATL The "Ten Giants" are: Tencent, Alibaba, Xiaomi, BYD, Meituan, NetEase, Midea, Heng Rui Medicine, Trip.com, and CATL.

Another theme is "shareholder returns," represented by dividends and buybacks. Goldman Sachs' China shareholder return investment portfolio has achieved a total return of 44% over the past two years, outperforming the MSCI China and CSI 300 indices by 12 and 34 percentage points, respectively, fully validating the effectiveness of the selective strategy.

In summary, Goldman Sachs believes that the "summer breakthrough" in the Chinese stock market has already occurred, but for investors, the next stage presents both challenges and opportunities.

As valuations return to normal levels, the appeal of simple index investment strategies declines. In-depth research, discovery, and holding of individual stocks and themes with Alpha potential will be key to future investment success