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Goldman Sachs Raises Forecast for H-Shares After Rally

Goldman Sachs Group Inc. raised its forecast for an index of Hong Kong-traded Chinese stocks by 12 percent because of improving economic growth prospects in developed markets.

The brokerage increased its target for the Hang Seng China Enterprises Index to 13,600 from the previous estimate of 12,100, Helen Zhu, an analyst at Goldman Sachs, wrote in a report dated today. The index, which has rallied 16 percent this year, slid 0.4 percent to 11,522 at 11:03 a.m. in Hong Kong.

Chinese stocks have rebounded this year on speculation slowing economic growth will spur the government to ease monetary policy. The H-shares index, which plunged 21 percent last year, trades at 8.6 times estimated earnings, compared with a four-year average of 12 times, according to weekly data compiled by Bloomberg.

“Valuation is low, we have passed the bulk of earnings cut and positioning is still light enough that many investors still have a ‘buy on dips’ mentality,” Zhu said in the report.

Goldman Sachs said in another report China remains its “strongest market view,” supported by an “accommodative policy cycle.”

The People’s Bank of China announced on Nov. 30 a cut in lenders’ reserve requirements ratios, the first reduction since 2008. The central bank raised interest rates three times and lifted reserve ratios six times last year to cool inflation that accelerated to its fastest pace in three years in July.

IMF Warning

Goldman Sachs said a “recent reduction of tail risks in the Eurozone” may also spur gains for Chinese stocks. Greek Prime Minister Lucas Papademos plans today to discuss with the nation’s political leaders the implementation of additional fiscal measures needed to secure a second European Union-led bailout.

China’s economic expansion would be cut almost in half should Europe’s debt crisis worsen, warranting “significant” fiscal stimulus from the government, the International Monetary Fund said in a report yesterday.

In the U.S., employers added 243,000 jobs in January and the unemployment rate dropped to 8.3 percent from 8.5 percent in December, the Labor Department reported last week in Washington. American manufacturing grew the most since June, the Institute for Supply Management said on Feb. 1 and the U.K.’s factory gauge reached an eight-month high.

‘Soft Patch’

The economy can avoid a so-called hard landing in 2012 even as growth decelerates further and hits a “soft patch” in the first quarter, Citigroup said in a report dated Feb. 5. With inflation contained, policy easing would help create a mild rebound in the second half, according to Citigroup.

Goldman Sachs cut telecom and consumer staples to “underweight” from “neutral” and lowered health-care to “neutral” from “overweight.” It raised transport and metals to “neutral” from “underweight” and maintained “overweight” ratings on banks and oil, according to the report.

Goldman Sachs raised its 12-month target for the MSCI Asia Pacific excluding Japan index to 490. It also upgraded Taiwan to “market weight” and cut Malaysia to “underweight.” India remains “underweight,” it said.

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