×

Goldman Sachs upgrades Chinese stocks to overweight for short-term trades

China's long-term economic picture remains murky, but it's time to take a tactical overweight position on mainland stocks, Goldman Sachs says.

Goldman issued a research note on Monday upgrading Chinese equities to overweight from market-weight.

"Even though the longer-term structural concerns, with respect to credit extension and overcapacity and so forth, are still there and are very concerning, in the near term we think that China is a good and continuing catch up trade," Timothy Moe, chief Asia equity strategist at Goldman Sachs, told CNBC's "Squawk Box.

He said China was a decent bet for traders looking to make money through the end of the year.

"We think on a cyclical basis, the economy will actually begin to strengthen in the fourth quarter because of recently announced policy easing measures," Moe said. "Corporate earnings are beginning to stabilize. They're not great in absolute terms but they're beginning to stabilize. Valuations are still moderate."

In the Monday note, Goldman said Chinese shares had lagged in recent months compared with Asia-Pacific ex-Japan and emerging markets. It added that shares' valuations were priced at "meaningful discounts" compared with regional and global emerging market peers.

The bank also noted that global funds were near their largest underweight on Chinese equities compared with benchmarks in more than a decade.

Beijing's decision to allow mainland insurers to participate in the Shanghai-Hong Kong connect, which allows mainland investors to buy Hong Kong shares and vice versa, was likely to drive fund flows, Goldman said. The bank added that the opening of the similar Hong Kong-Shenzhen connect would likely be at the least a sentiment boost when it was launched.

Goldman raised its MSCI China index target to 70 from 60.5, implying an upside of about 9 percent from current levels.

Photographer | Collection | Getty Images

To get exposure to China stocks, Goldman tipped looking at index heavyweights on the expectation that those shares would benefit from passive, index-tracking flows into emerging markets. Within that subset, it remained positive on technology shares and American Depositary Receipts (ADRs), noting that the technology segment has contributed most of MSCI China's gains so far this year.

Goldman also expected that high-yielding stocks in Hong Kong would gain, particularly on interest from onshore institutional investors. But since Chinese and Hong Kong bank shares had already received strong inflows, Goldman pointed to better prospects from yield plays in Chinese utilities, Macau shares and Hong Kong and Chinese property names.

Goldman said domestic infrastructure beneficiaries were another investment theme, but noted that translating that into actionable stock plays generally wasn't straightforward, as tracking project approvals and execution in China posed challenges. But it said some stocks had previously shown sensitivity to fixed asset investment growth, including China Railway Group, Longyuan Power and CRCC.


Follow CNBC International on Twitter and Facebook.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1