Morgan Stanley’s top three themes in Chinese equities

Morgan Stanley recommends three themes for the next stage of the rally.

Chinese equities, Morgan Stanley, reopening, economy, report, job gains,
Our bullish view on Chinese equities is not just about reopening, nor is it only a cyclical call.

Morgan Stanley in a report titled ‘China Macro & Consumer Outlook: Recovery Beyond Reopening’ sees a recovery momentum being sustained after reopening, as the return of growth-focused policy pragmatism revives business and job confidence. Excerpts from the report:

The turnaround in travel Year To Date and our AlphaWise surveys suggest limited scarring on consumers. We see the next stage of recovery powered by broader job gains and a revival of “animal spirits,” thanks to underappreciated ramifications of reopening and a return of pro-business policy pragmatism. The intrinsic link between continued economic progress and social stability is being firmly re-established, and we believe pragmatism will continue to tackle structural headwinds of weaker demographics and slower productivity growth.

We expect GDP QoQ SAAR to average 6.6% in 2023 and 4.4% in 2024, corresponding to 5.7%Y and 5.1%Y, respectively (vs. 3.0% in 2022). As the job market recovery boosts incomes, normalizes consumption appetites, and possibly reduces excess savings, real private consumption appears set to grow >9% from a low base (2Y CAGR reaching 5% in 2H23 vs. >6% pre-Covid), lifting headline GDP by 3.8pp, while housing plus infra capex contribute just 0.3pp, we estimate. We think the housing downturn is unlikely to take a lasting toll on the economy from the balance sheet channel, as the price correction is modest so far and likely temporary given the potential for more easing.

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Consequently, our bullish view on Chinese equities is not just about reopening, nor is it only a cyclical call. We see 13% upside in 2023 for MSCI China and Hang Seng, with key drivers gradually shifting towards earnings and ROE improvement. Valuation is also still attractive (11x forward P/E, MSCI China) vs. broader EM (12.1x, MSCI EM).

We recommend three themes for the next stage of the rally:

1) China Best Business Models stock selection which offers long-term ROE supremacy and a superior risk-adjusted return profile;

2) selectively adding back A-share exposure while retaining a preference for large-cap. internet names with a focus on Alibaba;

3) reopening beneficiaries. Policy continuity and geopolitical developments remain the two risks that we are keeping a close eye on.

Within the consumer sector, we expect earnings estimate increases in 2H23 on a nonlinear recovery path – we project a bumpy recovery before April and retail sales to be back on a normal growth track in 2H23 (to reach 125-130% of 2019’s level by end-2023, vs. ~105% at end-2022). We prefer discretionary stocks in such a setup including sportswear, alcoholic beverages and home durables. Top picks for the year are Anta and Topsports, Moutai and Wuliangye, and Midea, Gree, and Robam.

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First published on: 18-02-2023 at 19:02 IST