The China rally may just be getting started

Chinese equities have soared following the announcement of a major stimulus package, and according to Goldman Sachs Research Chief China Equity Strategist Kinger Lau, further upside could be ahead.

“We think the rally makes sense,” Lau says. “The Chinese government has shown its commitment to supporting economic growth – which is exactly what investors have been waiting to hear.”

He acknowledges that some investors may be hesitant about buying after such a significant move, which may explain why the market has corrected. But he adds that a historical analysis suggest that “this rally could have legs,” given that “when we’ve seen 20% rallies in Chinese stocks, that rally has continued over the next several months.”

Lau adds that Chinese stocks remain “quite reasonably valued – with valuations only rising back up to historical averages.”

Finally, he notes that Chinese equities’ correlations with developed markets have fallen to around 30%, which suggests that exposure can provide diversification benefits for international investors.

“So even if the rally does lose momentum,” Lau says, “we think Chinese equities still have a place in investors’ portfolios.”