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Goldman Sachs cuts earnings outlook for MSCI China to zero growth

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In China, people typically buy apartments before they’re accomplished. Pictured here on June 28, 2022, are unfinished residences in Nanning, Guangxi Zhuang Autonomous Region.

Future Publishing | Future Publishing | Getty Images

BEIJING — Goldman Sachs has cut its forecast for the MSCI China index because of a worsening slump in China’s property market.

The investment bank slashed its earnings outlook for the index to zero growth for the yr, down from 4% previously, in accordance with a report published late Thursday.

The analysts also cut their MSCI China price goal over the following 12 months to 81, down from 84. MSCI China tracks greater than 700 China stocks listed globally, including Tencent, BYD and Industrial and Industrial Bank of China.

The index has tumbled greater than 6% in July alone as worries about China’s property market added to existing concerns about Covid, tech regulation and geopolitics.

The brand new, reduced goal means there’s one other 18% upside from the index’s close of 68.81 on Friday, but it surely also means the index is anticipated to say no by about 3% this yr versus posting a gentle gain.

Pressure on Chinese real estate

“Residential-led growth” for China’s economy is coming to an end, Henry Chin, head of research for Asia-Pacific at CBRE, said Monday on CNBC’s “Squawk Box Asia.”

He pointed to an underlying bifurcation available in the market: housing demand coming back in China’s largest cities, but oversupply in smaller cities that might take “as much as five years” for the market to soak up.

Real estate and related industries account for greater than 25% of GDP in China, in accordance with Moody’s.

Goldman’s property team has cut its expectations for brand spanking new housing starts — a year-on-year decline of 33% within the second half of the yr versus a previously forecast 25% drop.

The investment bank’s equity analysts expect state-owned property developers to outperform those not owned by the state. Inside China stocks, Goldman prefers sectors reminiscent of autos, web retailing, and semiconductors, but is cautious on bank stocks because of their exposure to housing-related loans.

Covid overhang

Earlier this month, Goldman economists cut their China GDP forecast to three.3%, down from 4%. The economists cited “all of the unresolved problems in Covid and housing in addition to the increased risks in global demand and Chinese exports.”

China reported 0.4% GDP growth within the second quarter from a yr ago, bringing growth for the primary half of the yr to 2.5% — well below the official full-year goal of around 5.5%.

Investment in real estate in the primary half of the yr fell by 5.4% from a yr ago, worse than the 4% decline in the primary five months of the yr.

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Nomura’s chief China Economist Ting Lu warned in a report Friday that “the slowdown could also be even worse than data suggest” and noted the property sector “deteriorated beyond even our bearish expectations.”

“The outbreak of Omicron and lockdowns from March to Can have materially worsened the situation, as lockdowns have limited Chinese households’ purchasing power and reduced their appetite and talent to buy latest homes,” Lu said.

While China’s latest Covid cases have climbed into several hundred a day, most infections have been within the central a part of the country fairly than the metropolises of Beijing and Shanghai.

Over the weekend, one in all the hardest-hit areas, Lanzhou city, said the chance of disease transmission has come under control.

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