Goldman Sachs maintains a positive outlook on Chinese equities, forecasting potential for more gains, but warns that the recent rally may face challenges ahead.
In a note released on Wednesday, the bank anticipates a slowdown in the bull market, with profit-taking likely as U.S.-China policy and geopolitical risks resurface in the coming weeks.
Macroeconomic And Political Uncertainties
While the firm acknowledges the possibility for further growth due to improving fundamentals, it emphasises the need to navigate the renewed macroeconomic and political uncertainties impacting risk sentiment in the region.
China’s equity markets have sharply rebounded from lows experienced in 2024, driven by better economic data and foreign investment resurgence.
Goldman’s analysts point to the recovery in key economic indicators as a driving force behind the market’s recent strength. Improved consumer activity, steadier industrial output, and enhanced credit availability have contributed to the upward momentum. Foreign institutional investors, having previously reduced exposure, are now showing renewed interest, helping to lift valuations from historically low levels. Nevertheless, the sustainability of this rebound is being questioned, as external risks start to gain traction once again.
Geopolitical tensions remain a point of concern. With policy decisions from Washington and Beijing poised to influence investor sentiment, uncertainty around trade restrictions and regulatory tightening could bring fresh volatility. Market participants have responded favourably to recent stimulus measures, but any signs of a firmer regulatory stance or unexpected shifts in diplomatic relations could dampen enthusiasm. Investors should remain prepared for periods of heightened instability, particularly as new policy developments emerge.
Corporate Earnings And Valuations
Corporate earnings are another factor to consider. While stronger economic conditions have supported recent performance, upcoming reports will need to meet heightened expectations. Companies that fail to deliver on revenue growth may find their stock prices under pressure, especially given the speed of the recent rally. At the same time, valuations that have run ahead of fundamentals could trigger bouts of profit-taking, as traders reassess whether the current pace of gains is justified.
Liquidity conditions also warrant attention. The People’s Bank of China has adopted a measured approach, ensuring credit remains available without fuelling excessive risk-taking. However, any adjustments in monetary policy could shift sentiment sharply. A more restrained stance from central authorities might limit the ability of markets to maintain recent strength. Meanwhile, global monetary policy trends, particularly signals from the Federal Reserve, will influence capital flows, with any hawkish surprises potentially prompting shifts in positioning.
Technical levels indicate that equities may face resistance after their recent recovery. Some longer-term indicators suggest that momentum could moderate as stocks test key thresholds. Market positioning has grown more optimistic, but this also leaves prices more vulnerable to short-term pullbacks if sentiment sours. While the broader trend remains constructive, periods of consolidation should not be ruled out, especially in light of external risks.
Broader risk appetite will also shape what happens next. If global investors maintain confidence in emerging markets, capital inflows could continue to provide support. However, any deterioration in global growth forecasts or renewed pressure on risk assets may lead to caution. With macroeconomic dynamics shifting, traders will need to stay alert to changing signals and recalibrate accordingly.
While the prospect of further gains has not been dismissed, near-term obstacles could test recent confidence. With an increasingly complex backdrop, adaptability will be essential in the weeks ahead.
