Can the Asia Equity Rally Continue?

Allison Nathan (0:05)

From the Trump-Xi meeting in China to the global race for advanced semiconductors, North Asia is increasingly at the center of both geopolitics and markets. So what's driving the region's momentum, and can it continue? Welcome to Exchanges, the weekly show where I find out how we here at Goldman Sachs are making sense of the most consequential events impacting economies and markets. I'm Allison Nathan.

My guest today is Tim Moe, Chief Asia Pacific Regional Equity Strategist and Co-Head of Macro Research in Asia in Goldman Sachs Research. We'll be discussing the implications of the Trump-G meeting, the semiconductor chip shortage, and the broader forces shaping markets across North Asia. Tim, welcome to Exchanges.

Tim Moe (0:50)

Well, thank you so much for having me.

Allison Nathan (0:52)

So Tim, let's start with last week's much anticipated summit between President Trump and China's President Xi Jinping. What stood out most to you from those discussions?

Tim Moe (1:04)

I think the key takeaway is that it appears no harm was done. I know that sounds like a very low bar, but if you want to classify the various presidential meetings, US presidential meetings with Chinese counterparts, there's an accepted scholarly classification structure of six different levels ranging from most positive and consequential to most negative. And this was in the middle with not really a lot of major change, but against the background of tension geopolitically, probably, and concern over US and China friction. Just having calm in the relationship, I think was appreciated and desired by both sides. And I think from a market perspective, where expectations were low going into it, that this is at least a welcome outcome, that no harm was done.

Allison Nathan (1:48)

So that is an encouraging takeaway. I think no harm done. I like that, Tim, and the way you put it. If we think about the Chinese equity markets, they have struggled to sustain momentum despite some periodic support measures, and we have seen many rallies. We just got another set of economic data out of China.

It wasn't particularly encouraging. What do you think global investors will need to see before confidence in China can really meaningfully improve?

Tim Moe (2:15)

So I think there's really three key points to make here within the ever complicated Chinese equity spectrum.

The first is that there's a really big difference between onshore A share equities and offshore commonly known H shares.

And if you look at the performance this year, A has outperformed pretty meaningfully. It's up close to 10% year to date. Whereas the MSCI China index, which is our favorite measure of offshore equity performance is down 2% year to date. So there's a decent spread between those two. We've been much more positive on A and happily so for a few key reasons, which in brief would be one, that there's very clear policy support for the structural strategic development of the equity market. And I was in Beijing about six weeks ago, visiting the regulators there, and the message from them is consistently constructive and along the lines I just mentioned.

Number two, with orbits the road is earnings and the consensus numbers for A shares have gone from 16 to 25% for this year. We're a bit lighter at 20, but still we've raised our numbers. And this was a reflection that China has come out of over three years of deflation measured by the PPI, the producer price index.

And that's gone positive for two consecutive months. The most recent reading being 2.8%, which is above consensus. And the reason why that's important is that more of the industry structure of the A shares is concentrated in upstream manufacturing oriented sectors, which much were sensitive to producer prices. So when you come out of deflation, that is something which gives a tailwind to earnings. That's been reflected in terms of both what's been reported for the first quarter and also analyst expectations. Now, in contrast to that, the A shares are more dominated by the Internet application area, the softer end of the spectrum of the AI trade. And that is something which has been languishing, partly because the attention has been more on upstream hardware, which I'm sure we'll get to later in the conversation, but also because the heavyweight stocks have been producing, frankly, poor earnings. And so I think really the story here is one of better than expected earnings delivery for onshore and subpar earnings delivery for offshore. And I think that helps explain the spread to a significant degree. And look, the last point I'll make is that within the offshore index, there's actually a bull market going on underneath the surface. So here's the key statistic. 37% of the MSCI China index is in those internet software oriented companies that I mentioned. 25% of that is Tencent and Alibaba, and there's a number of others which make up the rest. But beneath that, there's a bull market going on in semiconductors, in biotech, in low earth orbit satellites, space trade, in robotics, etc. But there's still small enough caps that they're not really picked up or they're overshadowed by the larger part of the index. So last point, if you look at, for example, the K-star index, which is the onshore smaller higher growth small cap companies, more tech oriented companies, or the equivalent offshore, you'll see that some 20% year to date. So you've got really a number of different Chinas within the whole China universe. And I think the trick for investors is how to know which part of that to focus on at any particular time.