Morgan Stanley upgrades Chinese equities and raises targets

Morgan Stanley has upgraded its outlook on two important Chinese stock indices, the MSCI China and Hang Seng. The bank has changed its rating to "equal weight." It believes that a significant change is happening in Chinese stocks, especially with those listed abroad. The bank highlights that a recovery in return on equity (ROE) and stock valuations is underway. This improvement is driven by three main factors: better corporate practices, increasing returns for shareholders, and a shift towards stronger sectors that are less affected by economic changes. Since 2020, companies have been raising dividend payouts and buying back their shares more often. Meanwhile, sectors that are sensitive to GDP changes have become less dominant in the MSCI China Index. Morgan Stanley also sees growth in the tech sector. Companies like AI startup DeepSeek show that China can compete in innovation. This could help boost ROE even during slow economic times. The bank raised its year-end targets for 2025, predicting the Hang Seng will reach 24,000 and the Hang Seng China Enterprises Index will hit 8,600. The target for the CSI 300 remains at 4,200. Morgan Stanley believes offshore stocks will perform better in the short term due to the onshore market's greater exposure to sectors sensitive to economic slowdowns. However, for a more optimistic view, the bank says there needs to be clearer improvements in the economy and a reduction in geopolitical tensions. Despite challenges, it thinks the stage is set for a better overall market performance, with foreign investor interest still low and stock valuations ready to adjust.