Goldman Sachs Bets on Chinese Health Stocks for Post-AI Trade

In Q2, profits for Chinese stocks tracked by Goldman Sachs rose 24% year-over-year, the fastest growth rate in five years, as nearly half of the MSCI China index constituents exceeded expectations. The technology and healthcare sectors led this performance, with tech shares leading but pharmaceuticals rapidly gaining ground.

Chinese stock profits jump 24% in Q2, fastest pace in five years

This 24% surge starkly contrasts with the 6% growth seen in Q1, highlighting a sustained acceleration in the second half. This dynamic has been largely fueled by AI-related stocks, benefiting from increased demand for data and computing solutions.

Goldman Sachs notes that AI-driven gains have started to saturate valuations, pushing investors to seek alternatives less exposed to tech cycles. The September 7 report highlights that discussions among over 1,500 Chinese companies now extend beyond hardware and semiconductors to downstream sectors like data centers, AI models, automotive, and healthcare (source: CNBC).

AI pushes investors toward healthcare alternatives

"As AI-related stocks become increasingly crowded and concentrated, many investors are looking for additional growth opportunities outside the AI Hard Tech ecosystem," warns Goldman Sachs' research team (source: CNBC). This quote reflects the shift to diversify portfolios toward sectors where AI's impact is more tangible in practical applications, notably in drug development.

Analysts observed that conversations with Chinese executives now include cancer treatments, metabolic diseases, and cardiovascular disorders, areas where AI accelerates therapy discovery and personalization.

Goldman Sachs filters stocks with >15% annual growth until 2027

To identify potential winners, analysts applied a strict filter: expected profit growth exceeding 15% annually until 2027, along with a 7% median increase in earnings per share estimates over the past month. This criterion aims to capture companies already outperforming consensus, signaling potential upward revisions.

The selection process prioritized stocks where Goldman Sachs' estimates significantly exceed market consensus, a sign that analysts anticipate upward estimate revisions in upcoming earnings reports.

Pharmaceutical healthcare represents a third of the 12 selected stocks

Of the twelve retained companies, four are pharmaceutical players, accounting for a third of the portfolio. Suzhou-based Innovent Biologics is expected to see its profits more than double next year, with a 54 percentage-point spread above average consensus estimates (source: CNBC). The company boasts a pipeline of cancer and metabolic disease treatments.

Shanghai- and Nasdaq-listed BeOne Medicines anticipates doubling its profits through promising oncological treatments. Hong Kong-listed CSPC expects 26% profit growth, driven by nervous system and cardiovascular medications. Hansoh Pharma, also listed in Hong Kong, projects a 15% profit increase, with a portfolio covering metabolic and oncological treatments.

Earnings projections exceed market expectations

If these four companies meet their forecasts, their performance would far surpass Goldman Sachs' expectations for the broader Chinese market, which anticipates an 8% MSCI China index profit growth this year versus a 17% general consensus.

This divergence suggests that the selected healthcare stocks could trigger an upward revaluation in the sector, spilling over to overall Chinese market valuations, particularly in MSCI China-tracking ETFs.

Implications for global equity markets

The mentioned Chinese pharmaceutical companies are already listed on international exchanges like the Nasdaq, facilitating access for global investors. Any upward estimate revisions could benefit health-focused funds and ETFs incorporating these stocks, strengthening the correlation between Asian and U.S. indices.

In summary, Goldman Sachs' report indicates that the post-AI pivot to Chinese healthcare offers superior returns compared to market expectations, provided growth projections materialize. Investors should monitor upcoming earnings reports to confirm these stocks' trajectories.