Chinese stocks could surge higher as investors get 'FOMO,' Goldman Sachs says

By Louis Goss

Chinese stocks have risen for four days in a row

The unleashing of a huge stimulus package by the People's Bank of China on Tuesday has already driven a four-day rally in stocks in the Shanghai Composite Index. But Chinese stocks could now be set to surge even further as international investors start to pile in, Goldman Sachs said.

"I have done more Zoom calls on China in the past 48 hours than all of 2024," Goldman Sachs' technical strategist Scott Rubner wrote in a note as he suggested investors are increasingly suffering from "FOMO" about missing out on the surge in Chinese stocks.

The Shanghai Composite Index CN:SHCOMP rallied for its fourth-day in a row on Friday in the sharpest increase in the index since July 2020, when the Chinese government unveiled a similar stimulus package to help boost China's economy during the COVID-19 pandemic.

Rubner noted that international investors have, so far, largely held back from investing in China's stock market rally, in what has seen the surge become a "pain trade" for foreign money managers who had previously positioned themselves against Chinese equities.

"Ever since the disappointment of the China reopening rally in November 2022, it has paid to fade market hopes of a sustainable China turnaround," Barclays analysts, led by Kaanhari Singh, said in a note.

Prior to this week's rally, hedge funds had less than 7% of their investments in Chinese stocks, in what marks a roughly five-year low. Mutual funds in aggregate had just 5.1% of their investments in China, in what represents a bottom 1 percentile figure over the past decade.

Now, international investors could be about to pile in and drive the rally even further, as money managers increasingly start to fear that they're missing out. "I really think this time is different for Chinese equities," the Goldman Sachs technical strategist said.

Tuesday alone saw Goldman Sachs' prime brokerage record its largest single-day net buying of Chinese stocks since March 2021 and its second largest net buying of China equities over the past ten years.

The record demand for Chinese stocks on Tuesday was driven almost entirely by long buying, Rubner noted, as he suggested investors increasingly seem to be coming to the conclusion that the current rally "may not be a fade this time."

The 75th anniversary of the founding of the People's Republic of China on October 1 could also help drive this rally further, which has already been boosted by news from the Politburo meeting on Thursday in which the Chinese Communist Party vowed to hit its 5% growth target.

In a note, Barclays' analysts said China's stimulus measures could add a whole percentage point to the country's gross domestic product (GDP) over a two year period, as they suggested the package signals China is now "serious about tackling its structural issues."

-Louis Goss

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09-27-24 0451ET

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