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GS: "Investor FOMO could increase Chinese stocks 50%"

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China most valuable shares could be on their way for big gains as “fear of missing out” takes hold, according to Goldman Sachs Group.

The Shanghai Shenzhen CSI 300 Index that includes those stocks “would give approximately 50 percent and 15 percent potential upside from current levels if retail optimism were to return to its peak in 2015 and 2018 respectively.” said Goldman strategists in their report on Sunday. They cite improving risk sentiment and lack of investor participation in the earlier stages of the rally as fuel for further gains.

The CSI 300 rose 28 percent from the end of 2018 until last week, becoming the world’s best trade for February, before retreating a total of 5 percent at the end of the week as investors were worried that Beijing wanted the surge to slow down. The index and other major China stocks are still beating the performance of most of the global equity benchmarks.

Goldman said its conversations with clients in recently they have focused on comparisons with peaks of market optimism in June 2015 and January 2018.

Risk appetite for Chinese stocks has improved a lot amid rising expectations of a trade deal with the U.S., potential for further inflows to Chinese shares, a clear shift to policy easing and a pro-market tone from senior policymakers.

It won't be a smooth path upward. Goldman sees a risk of further near-term profit-taking after the quick rally that started the year, especially if macro data releases continue to be soft, earnings surprise to the downside or a U.S.-China trade deal has a negative impact on the markets.

Most investors Goldman spoke to saw a 5 percent to 10 percent “retracement from the recent highs as a sensible level to re-engage,” according to the report. The combination of expected bullish events and investors trying to jump on board means that there should be lots of room for a rally.

Source: Bloomberg Finance L.P.
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Charts: Used with permission of Bloomberg Finance L.P.


 Trader Georgi Bozhidarov

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