Morgan Stanley Strategists Warn Against Chasing China Stock Gain

The momentum behind one of the world’s biggest stock rallies in China will likely abate, according to Morgan Stanley.

Morgan Stanley Strategists Warn Against Chasing China Stock Gain

Investors shouldn’t chase the recent gains further at the index level, strategists at the US bank led by Laura Wang and Jonathan Garner wrote in a note Tuesday. They recommended instead pursuing single-stock and thematic opportunities given improved investor sentiment.

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“Global investors’ fund positions have already improved; meanwhile, there is less urgency to diversify away from the US and Japanese markets, given that the geopolitical, yield, and FX factors are abating or reversing,” they wrote. “We also see near-term technical overbought signals, which could deter further buying by global quant funds.”

Chinese equities have bounced back from multiyear lows as cheap valuations, better macro data and Beijing’s supportive policy stance attract foreign inflows. Hong Kong’s Hang Seng Index was one of the best performers among major global equity gauges over the last month. Some market watchers think global funds’ underweight position in Chinese equities has likely reached a bottom.

Morgan Stanley was among the first Wall Street banks to downgrade Chinese stocks — doing so in August as the market rout deepened — and has since kept its equal-weight rating. The firm further slashed targets for major Chinese stock benchmarks in January. The MSCI China Index has rebounded 14% since then.

China’s consumption and the housing market likely need more time to pick up, implying ongoing pressure on deflation and corporate earnings, Morgan Stanley’s strategists wrote. The pace of real estate policy change is likely to remain “rather modest,” they added.

The property market has remained depressed even as Beijing vowed to resolve inventory issues, and more cities eased home purchase restrictions to revive sales. 

Looking ahead, the brokerage also sees geopolitical uncertainty as a headwind for Chinese equities given looming US elections and EU trade controversy.

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