The escalation of geopolitical tensions centered on Russia and Ukraine has led to widespread losses in global stock markets - with the MSCI World Index down nearly 5% over the past two weeks, extending the correction to 10% this year.

In China, cross-industry correlations have risen to a five-month high, and northbound funds have turned net outflows in recent days.

  At present, the concern of all walks of life is that, from experience, when global geopolitical risks intensify, the Chinese market tends to perform better, because Chinese companies mainly rely on domestic revenue (only 8% of revenue comes from overseas), and foreign investment in A-share holdings are still relatively limited.

Recently, Goldman Sachs said that this situation (the relative performance of the Chinese stock market) still exists, but with the Sino-Russian trade volume doubling in the past five years and foreign investors' participation in the Chinese stock market steadily rising, the market is volatile. It is still inevitable that it will intensify, so investors need to be more targeted in the layout.

Goldman Sachs' H-Share Risk Barometer (ERB) has fallen sharply into negative territory recently.

  In the current environment, the agency stated that it is still overweight A shares, and suggested: more overweight A shares than the offshore market; focus on sectors that meet the improvement of social equity; focus on defensive growth stocks; Topics include oil, gold, upstream metal stocks, China's defense sector, and the winners from the appreciation of the renminbi.

Declining risk appetite leads to northbound capital outflows

  In the past week, the cumulative net outflow of northbound funds was 6.413 billion yuan, and the cumulative net inflow this year was nearly 18.7 billion yuan.

  Outflows have been linked to rising global risk aversion.

Gao Ting, director of Nomura Oriental International Research Department, told reporters earlier that generally speaking, when overseas market sentiment is optimistic and risk appetite is high, it will bring relatively abundant capital into A-shares, because emerging markets are an important part of international investors. risky market.

In 2021, global central banks will release a lot of liquidity, and U.S. stocks will gain nearly 20%, and the net inflow of northbound funds will also exceed a record high of 400 billion yuan throughout the year.

However, in 2022, the above-mentioned support factors will all subside. In addition to geopolitical factors, central banks dominated by the Federal Reserve will begin to raise interest rates, and liquidity will face a contraction.

  Goldman Sachs said geopolitical tensions could indirectly affect Chinese equities from four channels, including rising risk premiums due to geopolitical tensions, which could spill over to emerging markets; contraction in global financial conditions; upside risks to inflation; and China's trade exposure with relevant countries mouth.

  Before the outbreak of the Russian-Ukrainian military conflict, global stock markets were already "struggling", U.S. interest rates were quickly and significantly repricing, and concerns about upside risks to inflation were growing, casting doubt on the outlook for global growth.

Since Russian President Vladimir Putin recognized the independence of Donetsk and Luhansk, the CSI 300, Nasdaq, S&P 500 and MSCI China have fallen by 0.5% and 2.1% respectively. , 2.6% and 5.8%. As of the end of last week, the declines of the above indexes in 2022 were 7.9%, 14.2%, 10.5% and 5.4% respectively.

  The sell-off in global equities coincided with a sharp drop in risk appetite in Chinese equities.

Goldman Sachs said that, first, the cross-industry return correlation has reached a 5-month high, indicating that macro risks have replaced micro factors as the main driver of the stock market; in addition, northbound capital inflows have been strong at the beginning of this year, but have turned into net outflows in the last week; Goldman Sachs The Offshore China Equity Risk Barometer (ERB) has fallen sharply to -0.7 over the past week, below its historical average.

  As the situation in Russia and Ukraine continues to change, the Chinese market will continue to be affected.

On the one hand, the United States, the European Union, the United Kingdom, Canada, Australia, and Japan have successively announced sanctions against Russia, and bilateral trade between China and Russia has doubled in the past five years; in addition, the offshore market is highly linked to global liquidity, and U.S. stocks have fallen sharply before. During the period, Hong Kong stocks showed a beta coefficient correction greater than 1; although the proportion of foreign shares in A shares was relatively low, their positions were relatively concentrated. If the risk aversion led to intensified selling, some specific industries or stocks may be placed in a position where their positions have declined. under risk.

  Still, Goldman Sachs believes that China A-shares tend to perform better when global geopolitical risks rise.

Only 8% of the CSI 300's revenue is directly related to external demand.

In addition, the proportion of foreign ownership of A shares is still at a low level (4.5%).

Low valuations may be another buffer, with forward P/E ratios of 11.1 times and 12.8 times for the MSCI China Index and CSI 300 Index, respectively, lower than the S&P 500's valuation of more than 20 times.

Overweight safe-haven-themed, defensive growth stocks

  According to Choice data, the layout preference of northbound funds is more prominent recently—overweight upstream resource sectors, deploy defensive financial sectors, bargain-hunting new energy sectors with strong growth certainty and previously suffered from undervaluation, and add some oversold pharmaceuticals shares, etc.

  Specifically, in the past 5 trading days, the stocks with the largest market value increased by northbound funds are: Zijin Mining, Shaanxi Coal Industry, Ningde Times, Sunshine Power, Three Gorges Energy, Postal Savings Bank, Sanhua Zhikong, Oriental Fortune, China Shenhua, WuXi AppTec, Aier Ophthalmology, Mingyang Intelligence, Rongbai Technology, Yiling Pharmaceutical, BOE A, Yangtze Power, Zhonghuan, Focus Media, LONGi, Sanqi Interactive Entertainment, and Pioneer Intelligence.

  It is not difficult to find that in addition to traditional defensive sectors, growth stocks with certainty of performance have also become the focus of foreign capital allocation.

Zhao Longlong, a stock fund manager of Shanghai Investment Morgan, mentioned to reporters a few days ago that considering the high performance growth rate, from the perspective of dynamic valuation, the current valuation of new energy vehicles has been adjusted to a relatively cheap level, and it will change from three to three. Focus on the layout: The first is to look for four major materials in the battery field: positive electrode, negative electrode, electrolyte, separator, including copper foil, which links are still in relatively short supply in 2022, and can continue Investment opportunities brought about by tight supply and demand in 2021; the second is to focus on the growth opportunities in the industrial chain brought about by the increase in the penetration rate of new energy vehicles in overseas markets, especially the US market; the third is to focus on technological breakthroughs in battery technology, new materials and other fields.

  Goldman Sachs also emphasized the importance of deploying defensive growth sectors.

Investor demand for stocks with low betas and valuations inevitably rises as risk appetite remains under pressure, the agency said.

However, common forms of low-beta value strategies have their drawbacks, for example: some low-beta industries are currently affected by trade frictions, especially telecommunications companies; some defense industries have seemingly attractive valuations in general, but when considering their growth potential , looks expensive; value opportunities are highly skewed towards real estate and banks, but these areas may see fundamental headwinds as China's economic growth remains to be stabilized.

  Therefore, Goldman Sachs screened 20 companies with a buy rating, which were relatively less sensitive in the previous downturn but had good earnings growth prospects, mainly in the consumer sector, including Invic, Akcome Medical, Juewei Food, Yili Co., Ltd., By-Health, CTI, Kweichow Moutai, etc.

  Goldman Sachs said it remains overweight A-shares and focuses on topics that are in line with social justice.

Previously, Goldman Sachs screened out a basket of stocks that fit the above themes, including 50 companies with a total market value of $900 billion, covering 25 sub-sectors, and a price-earnings ratio of 24.9 times. It is expected that the compound annual growth rate of profits this year and next will reach 29%, including 50 A and H shares such as Xiaomi, LONGi, CDFG, Luxshare, Li Ning, Gree, Sungrow, Hengrui Medicine, Ctrip, Anta, and Muyuan.