Goldman Says U.S. Tensions Won’t Hurt China Stocks Too Much, Yet

(Bloomberg) -- The relationship between the U.S. and China would have to get a lot worse to hurt Chinese stocks in a significant way, according to Goldman Sachs Group Inc.

There's “still-decent risk/reward for Chinese stocks unless U.S.-China relations substantially deteriorate from here, lending support to our Overweight call on China in a regional context,” strategists including Kinger Lau and Timothy Moe wrote in a note dated July 5. “Old Economy and Value may have generally overreacted to the rising tensions, while ‘New China' and Growth may have under-priced the US-China risk” in recent months, they added.

The strategists came to that conclusion via a U.S.-China “relations barometer” they created that includes factors like geopolitics and capital markets. A gauge of trade tensions they've been using doesn't fully capture the broad range of issues that have begun to affect markets, they said.

Chinese stocks have outperformed so far this year, amid expectations the country's economy is bouncing back from the hit taken due to measures to stop Covid-19. The MSCI China Index is up 7.2% and Shanghai Composite 6.8%, while the S&P 500 is still under water by 3.1% and MSCI's all-country equity gauge is down 5.9%.

“Stocks that appear most exposed to U.S.-China relations are technology companies and ADRs while domestic-demand-focused consumption and health-care names should be relatively immune,” the Goldman report said.

Companies that tend to underperform amid rising tensions include Beijing Dabeinong Technology Group Co., Suzhou Dongshan Precision Manufacturing Co. and BYD Electronic International Co., according to the strategists, while those that tend to outperform include Shenzhen Kangtai Biological Products Co., Li Ning Co. and CSPC Pharmaceutical Group Ltd.

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