China stocks may post 6-8% upside over next 12 months on pivot to growth policies, Morgan Stanley says
- Morgan Stanley maintains its equal-weight recommendation on Chinese stocks, saying hurdles to a sustainable market recovery are still high
- The US bank continues its preference for consumption stocks and select materials and industrial companies while retaining its underweight rating on property, banks
The MSCI China Index, which tracks 765 companies trading on the onshore and offshore markets with a combined capitalisation of US$1.87 trillion, will probably finish at 60 by the end of next year, a 5.8 per cent gain from last week’s close, analysts led by Laura Wang and Jonathan Garner said in the US investment bank’s strategy report released on Sunday. Their end-2024 target of 18,500 for the Hang Seng Index implies a 6.2 per cent upside from the current level, while a 3,850 target for the yuan-denominated CSI 300 Index represents a 7.6 per cent gain, according to the report.
Morgan Stanley maintains its equal-weight recommendation on Chinese stocks, saying that the hurdles holding back stocks still remain and that Beijing would need to do more on the policy front to convince investors of its determination to restore growth.
The bank said enticements could include “more clarity on policy priorities and consistency, follow-up measures to break out of the debt-deflation loop, the path to achieving sustainable growth in a post-property boom era, and a stabilising geopolitical environment”.
Chinese stocks’ performance has been weak in the current year as economic growth ran out of steam soon after the nation reopened its borders following three years of pandemic curbs, leading to the unwinding of the reopening trades. The Hang Seng Index has declined 12 per cent year to date and the CSI 300 gauge has fallen 7.6 per cent, both among the worst-performing key benchmarks in Asia. To revitalise growth and prop up stocks, policymakers have unveiled a flurry of stimulus measures, including loosening of restrictions on the property market and a surprise expansion of the budget deficit through the sale of 1 trillion yuan (US$137.1 billion) of special government bonds.
“There have been some early signs that the policy pivot may be finally happening in the right direction, signalled by the latest budget deficit expansion in the middle of the year,” Wang and Garner said in the report.
Separately, Goldman Sachs predicted in a report on Sunday that that the MSCI China Index would rise 12 per cent next year and the CSI 300 would gain 16 per cent, driven by at least 10 per cent earnings growth and moderate valuation expansions. The bank stayed overweight on onshore stocks, citing its low sensitivity to the geopolitical risk and better sector alignment with policy tailwinds, while lowering the rating on offshore shares to market-weight.
Sector wise, the US investment bank upgraded the rating on food, beverage and tobacco companies to overweight from equal-weight to reflect the sector’s branding and pricing power, but it maintained an underweight rating on banks and property developers due to an uncertain outlook and shrinking margins.
“The hurdles to a sustainable China equity market recovery ahead are still high due to pressure on corporate fundamentals, further currency weakening and uncertainty on the liquidity front as well as concerns over policy direction and continuity,” the report said. “More is needed to convince investors to come back meaningfully to the market.”
“The debate on investing in China has shifted profoundly towards long-term structural challenges, particularly around debt and deflation, which have deterred further long-term allocation at the current juncture,” Morgan Stanley said in the report. “2024 could be a defining year for China to start systematically tackling these issues.”
