China’s twice-a-decade Communist Party congress may fail to give equity markets a boost this time around as Covid restrictions and a property market slump add to pressures on the economy, according to Goldman Sachs Group Inc.
Growth momentum has been historically strong in the run up to the key political event, but “it’s uncertain whether the historical precedents will be valid” for the Oct. 16 gathering, wrote strategists including Kinger Lau. Goldman expects China’s Zero Covid policy, which has been offsetting the impact of policy easing measures, to stay until the second quarter of 2023.
MSCI China Index has fallen nearly 20% from a June high
The MSCI China Index has typically generated about 2% returns in the month before the Party congress in the past, with commodity cyclicals and select consumer sectors trading well, the strategists said in a Sunday note.
The gauge fell as much as 1.4% Monday, taking losses this month to more than 8%. The underperformance versus benchmarks for regional and global stocks comes amid resurgent Covid lockdowns and a property market turmoil.
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With Covid Zero restrictions as the key overhang to growth, Goldman Sachs sees fiscal policy doing most of the heavy lifting to offset economic headwinds.
It doesn’t expect a “drastic shift of policy dynamics” following the congress, but says the confirmation of personnel changes “may lead to better policy coordination and more efficient implementation,” according to the note. China’s President Xi Jinping is likely to secure an unprecedented third term at the leadership gathering.
Goldman’s view is more cautious than that of investors surveyed by Bloomberg, a majority of whom see Chinese equities gaining ahead of and over the six months following the confirmation of Xi’s leadership as policy uncertainties are removed.
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The strategists said onshore Chinese shares are better positioned than their offshore peers, with their lower foreign ownership ratio and less sensitivity to external risk factors.
“The potential policy status quo continues to suggest that sectors and stocks that are more favourably exposed to policy accommodation” should outperform, they said.
