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China stock market

Morgan Stanley and Goldman Sachs say Hong Kong stocks to rise in 2019

  • Morgan Stanley forecasts an 8 per cent rise of the Hang Seng Index, while Goldman Sachs predicts a 6 per cent gain of the MSCI Hong Kong Index
PUBLISHED : Tuesday, 27 November, 2018, 1:16pm
UPDATED : Tuesday, 27 November, 2018, 10:59pm

Hong Kong’s stocks will probably rise about 8 per cent in 2019, as the valuations of Chinese companies trading in the city’s market recover from battered levels and buying from the mainland’s traders picks up, according to Morgan Stanley. Goldman Sachs predicted smaller gains in the city’s stocks.

The benchmark Hang Seng Index was likely to finish at 28,500 by the end of next year, strategists led by Jonathan Garner at Morgan Stanley said in a report outlining its outlook of emerging markets in Asia. It also predicted that China’s onshore stocks might gain 10 per cent in 2019 and the mainland would have its rating upgraded, depending on the development of the trade war with the US and Beijing’s policy easing.

Chinese companies trading in Hong Kong would continue to narrow the valuation gap with other emerging markets in 2019 and eventually trade on a par with their counterparts, the report said. The stocks would trade at 11 times estimated 12-month earnings in 2019, compared with 10.3 times currently, it said.

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“Given the progress China has made over the last three years on deleveraging, we believe China does not deserve a valuation discount relative to emerging markets,” Garner said in the report.

Given the progress China has made over the last three years on deleveraging, we believe China does not deserve a valuation discount relative to emerging markets
Jonathan Garner, Morgan Stanley

The Hang Seng Index dropped 0.2 per cent to 26,331.96 on Tuesday. The gauge of 50 blue-chips has lost 12 per cent this year, battered by China’s intensifying trade dispute with the US, slowing earnings growth for Chinese companies and a weakening local currency.

Goldman Sachs predicted that the MSCI Hong Kong Index might rise to 15,199 next year, implying a 5.7 per cent increase from the gauge’s Monday close.

The two US banks said buying of Hong Kong stocks through the exchange links with the mainland’s bourses would gather pace again, giving further support to equities.

Goldman estimated southbound inflows to reach US$20 billion next year, compared with US$11 billion so far this year.

“The structural nature of southbound flows remains intact, underpinned by strong diversification demand from mainland investors,” said strategists Kinger Lau and Timothy Moe at the US bank.

“This, combined with persistently-light allocation from global mandates in the offshore market, could amplify any potential sentiment-led recovery should concerns about trade and reform recede.”

Strategists can’t agree on what’s in store for China stocks in 2019

Morgan Stanley recommended buying China’s old-economy stocks, namely material producers, in the early part of 2019 and switching to new-economy ones, such as consumer and technology companies, with the trade tensions easing and licensing restrictions on internet games being lifted.

The US bank has an equalweight rating on Chinese stocks after a downgrade from overweight in June. It has updated the rating on emerging-market stocks to overweight, citing narrowing differentials over economic and earnings growth between developing and developed nations.

Additional reporting by Chad Bray

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