Goldman: 'Buy On Corrections' In China

In a new report out this week, Goldman Sachs analyst Kinger Lau gives Golman’s take on the market turmoil in China. Despite fears of a market crash, Lau believes that the recent drop in the Chinese market is actually just a large bull market correction.

Correction, not crash
According to Goldman global bull markets that have occurred during the last 40 years have witnessed a correction of at least 20 percent 44 percent of the time. These corrections are driven primarily by shrinking PE multiples, but rarely do they contract below 15x.

Goldman believes that what China is currently experiencing is a standard bull market correction, not a transition into a bear market.

Deleveraging is key
In the A-shares market, Goldman believes that the leverage unwinding process is about 2/3 complete. Lau explains that the deleveraging process is a critical part of maintaining the long-term bull market in China.

While the process may be painful in the short-term for investors, Goldman is confident in the Chinese government’s willingness and ability to provide support to the market to avoid any potentially dangerous collapse.

Buy the dip?
Since Goldman sees the dip in China as a correction and not an end to the bull market, the recent pullback has created value in many parts of the Chinese market. “The liquidity backdrop for H/ADRs could be choppy near-term as Mainland flows unwind, but the selloff has offered investors attractive opportunities to buy,” Lau writes.

In addition to A-shares stocks that are cash-rich and attractively valued, Goldman recommends buying oversold ADRs with solid fundamentals. The firm recommends Jumei International Holding Ltd JMEI and Alibaba Group Holding Ltd BABA.