As global giants like Goldman Sachs and UBS express buoyant forecasts for China's capital market, there is a palpable optimism regarding the trajectory of Chinese assetsTheir assessments suggest a significant recovery in corporate earnings by 2025, which is expected to bolster the market’s upward potential, paving the way for a steady influx of capitalSuch favorable projections underscore the resilience of China's economic fundamentals, even amidst the occasional volatility seen at the beginning of 2025.

At the recent UBS Greater China Conference held on January 13, Meng Lei, an analyst from UBS Securities, elucidated the reasons for this optimistic outlookWhile the A-share market may have experienced fluctuations at the onset of 2025, the underlying improvements in fundamental factors remain unshakenThis sentiment is echoed throughout various financial discussions advocating for a recovery path for Chinese corporate profits, particularly during the latter part of 2024. Analysts predict that the profitability trend will manifest significantly in the earnings growth of the MSCI China Index and the Shanghai and Shenzhen 300 Index, by around 6% and 10%, respectively.

Valuation metrics also reveal a favorable environment for investors

Meng pointed out that both the Wind A-Share Index and the Shanghai and Shenzhen 300 Index are currently under their five-year averages, while equity risk premiums sit at a historical high above their meanThis scenario paints a picture of high cost-effectiveness for A-shares, suggesting ample room for market appreciation.

Moreover, the anticipated influx of capital is expected to come from both individual investors and what is referred to as “patient capital.” The recent introduction of additional growth-oriented policies is projected to restore investor sentiment, prompting a fresh wave of net inflows from retail investorsLong-term capital, typified by insurance funds and social security investments, is likewise gearing up to make its presence felt in the marketThe implementation of new accounting standards is encouraging insurance entities to include high-dividend stocks in their investment portfolios to smooth out earnings volatility, thus enhancing equity investment returns.

In parallel, investment strategies are adjusting to leverage the changing market dynamics, with patient capital seeking alternative routes such as Exchange-Traded Funds (ETFs) to support the capital market mechanisms.

Goldman Sachs, through its chief China equity strategist Liu Jinjun and his team, recently substantiated its positive outlook in a report predicting earnings growth for both the MSCI China Index and Shanghai and Shenzhen 300 Index to be approximately 7% and 10%, respectively, by 2025. This aligns with an attractive risk-return profile, prompting the recommendation to increase allocations to A-shares and offshore Chinese stocks, believing that relative return dynamics between A-shares and Hong Kong stocks will align as sentiments and liquidity conditions begin to improve by the first quarter of 2025.

Significantly, foreign investment firms have eagerly intensified the upward revision of ratings on Chinese assets

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On January 13, Morgan Stanley moved to upgrade several key stock ratings for major Chinese airlines, marking a shift in investor sentiment toward these sectorsChina National Aviation Holdings, Eastern Airlines, and Southern Airlines all saw their A-share ratings elevated to neutral, with target prices set at 9.63 CNY, 4.66 CNY, and 7.87 CNY respectivelyIn the Hong Kong market, similar upgrades followed, reflecting a broader reassessment of the aviation sector's potential in a recovering economy.

Goldman Sachs also revised its ratings for numerous banking stocks, recognizing the improving economic landscapeThey adjusted the ratings for Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China, and China Merchants Bank, reflecting the optimism about their capacities to deliver substantial returnsTheir A-share and H-share targets ranged widely depending on the bank's growth prospects, indicating a solid belief in the robustness of Chinese financial institutions

For instance, the target price for Bank of China was raised on both A-shares and H-shares, illustrating a strong belief in profit generation and dividends as core aspects of investment strategy.

UBS’s Pan-Kun Lian, the head of the Greater China Research Department, emphasized that return rates are a pivotal factor in attracting investorsThe MSCI China Index’s companies are recording record-high figures in dividends and stock buybacks, a trend that particularly appeals to foreign investors keen on long-term commitmentsThis wave of corporate behavior underscores the enduring relevance of shareholder returns in driving investment strategies across sectors.

Liu’s team at Goldman Sachs noted that the unprecedented cash dividend disbursements from Chinese listed companies, along with declining risk-free rates, will keep shareholder return strategies—centered around dividends and buybacks—paramount