Goldman Sachs indicates that the return rate of the CSI 300 this year may reach 19%, maintaining a "high allocation" for China A-shares. What information is worth paying attention to?

Leverage Peaks and Financial Strategies in China and the US

Residential sector leverage has peaked, local government leverage has also reached its peak, and the leverage of small and micro enterprises has essentially peaked as well. This is the biggest issue.

Only the central government’s fiscal leverage remains low.

In contrast, the United States relies on federal fiscal leverage to reduce the leverage of the residential sector and small and micro enterprises.

Therefore, the use of financial leverage in China must be correctly targeted at local levels. Misapplication could lead to dire consequences.

The best approach would be direct monetary distribution to residents and small and micro enterprises, tightly controlling capital outflow and then boosting the stock market. Incidentally, it’s time to streamline local public service and institutional staffing where necessary.

This is essentially the only path forward.

Why is relying on construction as a form of relief not beneficial? Because it is heavily dependent on government officials and elders, and its marginal efficiency has become exceedingly low.

Despite its issues, A-shares are still a hundred times more transparent than the non-standard financing market of various local projects.

Regarding the US, despite its challenges, it essentially shifts these difficulties to sovereign debt. Unpleasant to say, but the more chaos there is in Eurasia, the lower the actual risk of default on US sovereign debt.

This is innate for the US; unless its homeland is directly attacked, other issues are inconsequential.

Domestic netizens naively think that chaos around the world signifies the collapse of US hegemony. Such levels of chaos can’t even push the US CPI above 5.

The lower the intensity of global unrest, the lower the risk of default on US sovereign debt. It’s like the US’s small and micro enterprises and residential sectors are freeloading off the global populace, especially from the hardworking people of East Asia.

If the Chinese government does not move in the right direction, opting instead for construction as relief and structural easing, enduring the hardship. A-shares might see a technical rebound this year with a few hundred points of movement.

Then it would be a continuous endurance, waiting until Europe, America, and Japan fully recover their consumer markets, and following in their footsteps to escape recession.

In this scenario, discussing industrial upgrading is somewhat meaningless.

What is the purpose of upgrading?

Without a significant debt restructuring domestically, further upgrades would still rely on foreign consumption.

Of course, some upgrading is better than none.

And then?

The hope might be for natural inflation to gradually level out the leverage ratios of residents and small and micro enterprises.

This process will be extremely, extremely painful.

Analysis of A-Share Market, Foreign Investment, and Projections for 2024

Goldman Sachs, at the end of 2022, believed that the valuation of A-shares would significantly improve in 2023, predicting a net inflow of about $30 billion in northbound funds.

However, in 2023, A-shares essentially fell throughout the year, and there was a significant outflow of northbound funds.

Goldman Sachs' predictions, often inaccurate, are akin to the usual statements from CITIC and CICC.

Even if the 2024 market recovers, it would have no relation to Goldman Sachs' forecasts, as they are generally baseless guesses.

Foreign Investors' Changing Views on A-Shares

Last year, foreign investors were bearish on A-shares, but recently they have turned bullish.

UBS recently stated that the China MSCI index must rise by at least 15%, citing extremely low valuations.

HSBC also jumped in, predicting the CSI 300 Index to exceed 3400 points this year.

Now, Goldman Sachs forecasts a 19% return for the CSI 300 and advises a “heavy allocation” to A-share assets.

Goldman Sachs is optimistic about sectors such as retail (online), media, technology hardware, medical equipment and services, and food and beverages.

It’s unclear if this optimism is genuine or if they are hoping to recover from being trapped in these sectors in 2024.

Recent Northbound Fund Inflows and Domestic Market Reaction

Today, there was a significant inflow of northbound funds, but the overall market volume was not large.

Domestic investors remained indifferent.

It seems that the outlook of foreign investors is not critical.

Without the approval of domestic investors, it won’t be easy for foreign investors to exit their positions.

2023: A Year of Foreign Capital Retreat and Future Outlook

2023 was indeed a year of major foreign capital withdrawal. Comparing with 2022, it’s evident that foreign investors were aggressively buying in the last few months.

This year, regardless of their reasons for optimism, the actual flow of funds will be crucial, particularly whether they will buy back the chips sold in the last few months of 2023.

Genuine optimism is shown by significant northbound fund inflows, not just by words.

Actions speak louder than words; practical efforts are needed, not just talk.

Moreover, major institutions have various departments with different views.

Some departments are bullish, others bearish.

Their reports reflect their specific roles and objectives.

If in a bearish department, they constantly seek negative news; if bullish, they look for positive news.

Therefore, when reading reports from major brokerages, one can find plenty of content supporting either direction.

In essence, bullish and bearish views are a daily occurrence, with numerous reports floating around.

It’s just a matter of which reports the media chooses to highlight.

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The Perspective of Foreign Investors and the Prospects of the CSI 300

How foreign investors view the market is irrelevant. The CSI 300 has already fallen for three years; if it doesn’t recover this year, it will be four years.

This duration of decline is rare in the history of the CSI 300, and its valuation has reached historical lows.

The current drop over three years is 44.9%, compared to 33.3% in 2018, 47.5% in 2015, 47.6% in 2010, and 72.7% in 2008.

Considering valuations and the extent of the fall, the current drop is indeed near the bottom.

Therefore, a 19% rebound in 2024 is not impossible, but a bull market in 2024 still seems unlikely given the global economic outlook.

After a rebound, the market is expected to continue fluctuating and bottoming out. The CSI 300 has limited downside, and most of the time will likely be spent in oscillating consolidation.

Earning significant profits will require more time, and post-2024, opportunities may increase.

In 2015, the stock market had a round of cutting, followed by a real estate market downturn in 2017. In between, there were also P2P lending, mass entrepreneurship, mass innovation, pyramid schemes, and telecom frauds, cutting into people’s savings. Even if the investors have mutated like being exposed to nuclear radiation, it still wasn’t enough to cover the losses.

Goldman Sachs still holds the logic it predicted would lead to a rise last year, that the Chinese government will inject money to rescue the market.

For instance, the 1 trillion yuan in new national bonds issued last year will be spent in Q1 this year. The approval of 1 trillion yuan for the transformation of urban villages will immediately enter the market. The government’s involvement in purchasing affordable housing with an initial allocation of 100 billion yuan for pilot programs has also brought in significant funds.

All of these involve actual monetary injections, which are different from last year’s practice of helping to repay debts, which only flowed within financial institutions.

As for the actual effects, let’s wait until the cement and production sales figures come out before making a judgment.

Recently, on Weibo, there have been numerous posts about Goldman Sachs' subsidiary, Qiankun Futures, making around 200 million RMB in profit from short selling in the past week. It’s unclear whether this is just a rumor or if there is solid evidence to support it. Interestingly, this has also brought Goldman Sachs into the spotlight as a role model for A-share investments.

Here’s a look at Goldman Sachs' prediction for the A-share market in 2023 from a year ago:

Goldman Sachs: A-share valuations will significantly rebound in 2023

This doesn’t necessarily mean that A-shares will continue to fall next year or that there will be a rush to buy beachfront houses by Goldman Sachs. It’s just to say that the macro predictions of these large institutions are, at most, worth a cursory glance. Their conclusions are often meaningless. They may not be accurate, and even if they are, they may not tell the truth for various reasons. All in all, their accuracy in forecasting is not even as good as a chimpanzee throwing darts.

The Shanghai and Shenzhen 300 (CSI 300) has already bottomed out, with only a 19% drop. Once those fund managers who cut their losses at the bottom come to their senses and start buying in groups again, they will chase higher, potentially tripling their investments in a year!

For those who don’t believe it, take a look at the weekly chart next week!

Online Observing A-shares Wild Ride:

Red Line: Pure Bond Fund Returns; White Line: Stock Index Returns. Data Source: Snowball Pao Da.

Currently, I’m walking my dog quite well, The dog has come running back, I’ll throw a bone for it to chase after.

Thank you for the invitation. I agree with Goldman Sachs' viewpoint that the overall trend of the A-share market in 2024 is upward, making it the best year since 2021. I have discussed the rationale in detail before, so I won’t elaborate further here.

Hmm, thinking more about Goldman Sachs' predictions is interesting, such as their predictions for China’s economic growth two years ago, the changes they forecasted last year, and so on.

In general, to achieve the success of a revolution, mobilizing the masses is crucial.