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Goldman Sachs is still wildly bullish on Chinese equities despite last night’s 5.4% sell-off and the continuing concerns about an overheating economy. They believe the sharp sell-off was an overreaction to the downside and gives investors an opportunity to move into the market.  They see enormous upside of over 35% by year-end:

“We reiterate our end-10 index target of 4,300 for CSI300 (35.4% potential upside) and see strong fundamental support at 2,900, which equates to around 16X forward P/E and translates into 8.7% potential downside from current levels.”

Their wildly bullish position is based on three primary reasons:

1)  The macro and micro economy remains very robust.  The latest reading of 11.9% GDP shows very strong growth with lower than expected inflation at 2.4%.

2)  The tightening measures are a long-term positive.  Despite near-term fears of a potential government induced slow-down Goldman says the tightening measures will not derail the recovery and are the prudent course of action.

3)  Valuations are attractive.  With the CI300 trading at 16.2X earnings the index is historically cheap compared to its 5 year average of 18.8X.

Source: GS

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