Morgan Stanley: Patience Through Bumpy Final Leg Of Bear Market

Morgan Stanley note that “MSCI China could be approaching the late stage of a bear market after a 14-month drawdown (51% down in absolute terms, 32% relative to MSCI EM since Feb 17, 2021), but the potential final leg is likely to be bumpy: The broader economic drag due to the Omicron spread and subsequent restrictive measures imply downside-skewed earnings pressure and a capping effect of potential immediate China policy easing. Meanwhile, external concerns, such as QT overlapped with a gloomier global outlook and extended geopolitical tension, could also curb near-term re-rating opportunity. Our June 2023 base case index targets are a respective 70; 21,500; 7,330; and 4,300 for MSCI China, Hang Seng, HSCEI, and CSI300, suggesting 9%, 7%, 8%, and 10% upside vs. the 6 May market close.”

• “We take the latest Politburo meeting signals positively, but would stay equal-weight on Chinese equities within the global EM framework in the near term. We welcome recent policymakers' reference to easing measures stepping up, with a focus on infrastructure boost, potential relaxation of property purchase restrictions and escrow fund access, and the positive role capital plays/completion of regulatory reset. That said, our China equity framework suggests that the policy positives could be discounted by the aforementioned factors, with downside risk more front-loaded in the near term.”
• “Signs to get more positive include: (sustainable) restoration of supply chain and concrete measures to prevent Covid-disruption; roadmap of Covid-zero relaxation would be a major plus; execution following the politburo announcements: easing step-up; positive guidance for regulatory reset and private enterprises; stabilization efforts for the property sector; volatility getting priced in for geopolitical tension escalation and QT/recession concerns; stabilization of CNY weakness; U.S./China audit agreement and resumption of Chinese company offshore IPOs.”
• “Continue to prefer A-shares vs. offshore China given their better positioning to benefit from potential easing in the near term, and alignment with long-term growth opportunities (IT, industrials, green economy, etc.). Latest official launch of personal pension scheme should also support institutional participation.”