Goldman’s 18 wins, 32 losses in ‘common prosperity’ bets show pain for investors struggling to navigate China’s regulatory minefields

Goldman Sachs isn’t having great success with Chinese stocks it picked from China’s “common prosperity” agenda. More misses than hits suggest investors will struggle with regulatory minefields in the US$13.7 trillion onshore equity market.

Two months after selecting 50 companies whose businesses are best aligned with President Xi Jinping’s wealth-sharing mantra, only 18 of them have prospered while the other 32 handed investors losses, according to data compiled by the Post.

Trip.com slumped 30 per cent since October 21 when the US bank published its 50-stock universe, making the travel operator the worst of the lot. Xinyi Solar, China Feihe, Senior Technology Materials, Yunnan Energy New Material and Tongcheng E-long made up the top laggards with 20 to 28 per cent slide.

Zhejiang Supor led the winners with a 40 per cent rally. Luxshare Precision, Wingtech Technology, Han’s Laser Technology and Thunder Software followed next with 21 to 35 per cent appreciation over the two-month period.

The early results underpin concerns that more pain may be in store for investors. The MSCI China Index, a collection of 741 stocks with US$2.6 trillion capitalisation, has underperformed the broader emerging markets this year by the most since 2004, according to Bloomberg data, with regulatory worries and economic slowdown at play.

“[Chinese equities are] still at a critical juncture,” Morgan Stanley said in its 2022 market outlook report. “We still see lingering risks into 2022, [including] earnings headwinds, extended tight liquidity, US-China non-trade tensions, and near term property market volatility.”

Goldman constructed its prosperity portfolio of 50 stocks with buy and neutral recommendations from its analysts. It comprises 39 yuan-denominated shares, 10 traded in Hong Kong currency and one listed in New York, with US$1 trillion in combined market capitalisation.

The portfolio trades on 26 times estimated 2022 earnings and is expected to grow earnings at a compound rate of 27 per cent annually through 2023. In comparison, the MSCI China Index traded at about 12.4 times forward earnings at the end of November.

Common prosperity is widely regarded as a key policy motivation for unprecedented shifts in the regulation and governance framework, strategists including Kinger Lau said in the October report. It could guide investment themes in the years to come, they said.

While investment aligned to China’s long-term policy goals has been “historically rewarding”, the idea may be too broad for some investors.

“There are many ways to interpret common prosperity, so it’s not something we pay a lot of emphasis on,” said June Chua, co-head of Asian and emerging markets equities in Hong Kong at Lombard Odier Investment Managers, which manages more than US$75 billion of assets globally. “Our focus is looking at sustainable business models, something within our control.”

As regulatory uncertainty persists, investors are instead seeking gains in sectors that enjoy policy tailwinds. Fidelity International favours sectors that align with China’s next phase of economic development, such as high-end manufacturing, renewable energy, electric vehicles, software and next-generation health care.

“China appears determined to move to an economic model geared to the real economy, rolling back debt and addressing inequalities, rather than reacting to any downside in financial assets,” Victoria Mio, director of Asian equities at Fidelity, said in its market outlook report.

“This should be helpful for markets in the long run, increasing moral hazard and enabling investors to price assets more accurately,” she added. “For investors with a long-term horizon, 2022 will be a good time to start building positions in Chinese equities.”

It’s certainly too early to judge Goldman’s top picks after two months as China began to indicate its readiness to loosen its grip on liquidity levers, borrowing costs and possibly fiscal purse strings to stabilise growth next year.

Goldman’s common prosperity portfolio, designed to be less sensitive to the ongoing regulation shifts and the activity slowdown in the property market, could also react more favourably to potential macro policy easing, the strategists said.