Morgan Stanley raises its 2018 index targets for Hong Kong, China equities

Morgan Stanley has raised its target for Hong Kong’s stock benchmark for next year, adding to a chorus of brokers that expect the market rally to continue higher on inflows of mainland capital.

In a research note released Monday, Morgan Stanley equity strategist Jonathan F Garner said he expects the Hang Seng Index to reach 31,500 by the end of 2018, up from a previous forecasts of 29,000.

The Hang Seng China Enterprises Index will close next year at 12,450, up from an earlier forecast of 11,700, according to the revised targets.

Among other indexes adjusted upwards, the CSI300 is forecast to end the year at 4,500 while the MSCI China is expected to climb to 100, up from 86 as previously forecast, lifted by ongoing double digit percentage earning growth among Chinese companies.

However, Garner factored in a slight slowdown in the pace of earnings growth, forecasting a 15 per cent gain in 2018 on year, easing from 20 per cent growth this year.

Morgan Stanley is the latest among investment banks to bump up its forecasts for next year, citing the sustainability of high earnings growth among Chinese companies. Last week, Goldman Sachs predicted the Hang Seng Index will rise to record 32,000 by the end of next year, driven by the new economy sector. HSBC said 2018 is likely to turn out to be another good year for Asian equities, amid trends that include a weaker US dollar, strong Chinese economic growth, and an earnings upgrade cycle.

Morgan Stanley said it continues to prefer the technology sector, but cautions of a valuation re-rating in large internet stocks. The US investment bank also likes high-dividend-yield stocks such as Hong Kong-listed financials, which should benefit from a pick up in “southbound flow momentum”.

Southbound net buying of Hong Kong-listed stocks has reached US$38 billion so far this year, one of the main drivers behind the 35 per cent surge in the Hang Seng Index.

A sell-off in large Chinese companies started last week after Beijing published draft asset management policy guidelines that would ban financial institutions from guaranteeing investors against losses.

“Retail investors are likely to find it harder to make investment decisions under the new wealth-management practises. Some liquidity may be put back into deposit accounts in commercial banks,” Xingdong Chen, chief China economist at BNP Paribas said in a research note.

Meanwhile, ING Bank said a major sell-off in China’s equity markets was unlikely.

“Financial deleveraging would only be mild and gradual. The central bank is very mindful that it should avoid systemic risk as stated in the 19th Congress,” said Iris Pang, Greater China economist at ING Bank.

She said market participants were anticipating rising corporate profits, which should be read as a positive sign for the economy.