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China Stocks Top Pick Among BRICs: Goldman's O'Neill

Chinese equities fell to their lowest levels since 2009 this week on concerns over an economic slowdown, but Jim O'Neill, chairman of Goldman Sachs Asset Management says mainland stocks present the most exciting investment opportunity of all the BRIC markets.

Jim O'Neill, chairman of Goldman Sachs Asset Management
Bloomberg | Getty Images
Jim O'Neill, chairman of Goldman Sachs Asset Management

“At this moment, the Chinese market looks the most attractive to me. You don’t want to be with consensus; it’s quite easy to be on the wrong side of things,” O'Neill, the man famous for coining the acronym BRIC, said at a press conference in Singapore on Friday.

With the benchmark Shanghai Composite trading at historically low valuations, he argues that the market is ripe for stock picking.

As China rebalances its economy towards being more domestically-driven rather than export oriented, there are going to be a lot of new winners, O’Neill said.

“Go long anything to do with the new China, and short anything to do with the old China,” he said.

He recommends taking this opportunity to invest in all sectors that are set to benefit from rising incomes in the middle class – including consumption and healthcare stocks, while staying clear of companies involved in heavy industrial production and their related commodities.

Chinese stocks have been one of the worst performers globally – down almost 6 percent since the start of the year, after falling 22 percent in 2011. Stimulus measures over the past, including the $150 billion-plus in infrastructure spending and incentives for exporters, have failed to drive a sustainable turnaround in the market. (Read More: China Stocks Breach Key Level, More Losses Seen)

O’Neill said the continued underperformance of the market can be attributed to disappointment among investors who have excessively high expectations for China’s growth outlook.

“The market has been on this drug of 10 percent growth – people think that China will rescue the economy with conventional historic type measures, that’s why the market keeps getting disappointed because they aren’t going to do that,” he said, referring to the country’s $4 trillion stimulus package unveiled in 2008.

He said that until the investment community readjusts their expectations to reflect the new, but slower growth era in China, the market is unlikely to rally.

“The sell-side (firms that sell investment services) consensus for China GDP growth is still close to 8 percent (for 2012), they are stuck on the drug of the past too. Consensus for next year is higher than 8.5 percent. The best thing for the market will be when the sell-side consensus brings growth forecasts down to 7.5 percent,” he said. “People need to stop thinking about China in the framework of the old China.”

No Hard Landing in China

While Goldman Sachs reduced its 2012 growth forecast for China to 7.4 percent from 8.2 percent earlier this month, O’Neill said the world’s second largest economy is not headed for a hard landing.

“It’s not clear the momentum is turning yet, but I’m pretty sure it won’t turn into a true hard landing as some people are saying,” he said.

However, he adds that there is a risk that growth in the third quarter could be weaker than in the second quarter. China’s economy grew 7.6 percent in the April-June period, its slowest pace in more than three years. (Read More:Chinese Growth Set for Decade of Slowdown: Barclays)

O’Neill said that aggressive monetary easing would bring momentum back into the economy, but that has yet to happen.

“Given how low inflation is — I wouldn't be surprised if there was some kind of monetary stimulus while we’re sitting in this room,” he said.

While the People’s Bank of China made its biggest-ever weekly cash injection into money markets this week aimed at preventing a potential short-term liquidity crunch at commercial banks, it has left interest rates on hold since its last cut in July.

—By CNBC’s Ansuya Harjani