Goldman Sachs Group Inc has downgraded its rating on China stocks traded in Hong Kong, citing weak earnings growth and the possibility of a consensus downgrade.
However, the bank has upgraded shares in India, highlighting the strategic appeal of the market.
Strategists, including Timothy Moe, have stated that with valuations generally fair relative to the macro backdrop, earnings are expected to be the main driver of returns in Asia markets.
As a result, the investment bank has lowered its rating for Hong Kong-listed Chinese companies to market-weight and Hong Kong firms to underweight.
The Wall Street bank has revised its stance on China equities multiple times this year due to negative sentiment in the country's stock market.
In August, it lowered its projected earnings-per-share growth for the MSCI China Index for the full year from 14 per cent to 11 per cent and adjusted the 12-month index target to 67 from 70. As a result, the index has declined by nearly 3 per cent since then.
Goldman Sachs continues to have a positive outlook on Chinese onshore shares.
They believe that sectors associated with China's shift towards higher productivity and self-sufficiency, such as artificial intelligence and new infrastructure, have the potential for strong performance.
The strategists explained that the onshore market offers more 'alpha' opportunities, which help to offset the structural challenges caused by the housing sector downturn, high debt levels, and adverse demographics.
India is anticipated to have the strongest structural growth prospects in the region, with mid-teens earnings growth projected over the next two years, as stated by Goldman.
The market's strategic appeal is mainly driven by domestic growth, providing investors with various opportunities to generate alpha.
These include themes such as Make-in-India, large cap compounders, and mid-cap multibaggers, according to experts.
Bhuvan Krishna is Staff Writer at Swarajya.
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