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.