Morgan Stanley: Thoughts on the rebound of this round of the Chinese stock market

Recently, the Chinese stock market has been outstanding, leading globally and in emerging markets in terms of weekly, monthly, and year-to-date performance.

Against the backdrop of macroeconomic stabilization and top-down market stability policies, the Chinese stock market has been accelerating since April 19. As of now, the MSCI China Index and the Hang Seng Index have risen by 9.5% and 8.9% respectively year-to-date, while during the same period, the MSCI Global Index and the Emerging Markets Index have only risen by 6.7% and 4.2% respectively.

Morgan Stanley presented some thoughts on the rebound of the Chinese stock market in a report on May 7.

Morgan Stanley pointed out four main factors supporting the current rise in the Chinese stock market:

Firstly, macroeconomic data has been improving this year, showing signs of economic stabilization. Secondly, there is uncertainty in overseas geopolitics and increased volatility in the US and Japanese markets.

Thirdly, by the end of January, global long-term investors had reached a historical high in their allocation to the Chinese stock market. Fourthly, the Chinese stock market is undervalued, with the MSCI China Index P/E ratio at only 9.9 times, a 20% discount compared to the MSCI Emerging Markets.

Looking ahead at the future trend of the Chinese stock market, it is important to focus on whether domestic fundamentals (especially corporate profits) will continue to improve, the benefits of state-owned enterprise reforms, and the theme of companies going global. Subsequent focus should be on signals such as first-quarter corporate profits, consumption growth, housing stimulus measures, "re-inflation," and developments in the geopolitical situation.

The Four Factors Supporting the Rise of the Chinese Stock Market

Specifically, from a domestic perspective, Morgan Stanley pointed out that signs of macroeconomic stabilization and efforts to stabilize the market are supporting the rise in the stock market:

Firstly, signs of macroeconomic stabilization in China are evident, especially with strong export and manufacturing data. Exports in January and February grew by 7.1% year-on-year, while the performance of industrial production and fixed asset investment exceeded expectations. The PMI index in April further confirmed that economic growth is recovering, leading Morgan Stanley to raise its forecast for China's actual GDP growth for the full year of 2024 from 4.2% to 4.8%.

Secondly, favorable policies have been frequent, with measures such as halving stamp duty since last year, restricting controlling shareholders from selling stocks, increasing shareholder returns (dividends and stock buybacks), and corporate governance reforms all supporting the Chinese stock market. The new "Nine Articles" for the capital market will institutionalize these measures.

At the same time, from external factors, Morgan Stanley pointed out that global investors have increased their allocation to the Chinese stock market to hedge against geopolitical uncertainties and volatile movements in the US and Japanese markets.

Since April 19, Hong Kong stocks have achieved a "ten consecutive rise," coinciding with heightened tensions in the Middle East at that time and a surge in the volatility index (VIX). Investors have closed profits on major US tech stocks/semi-indexes that outperformed the market and adjusted their portfolios. Expectations of softening US bond yields and a weak yen have also intensified such actions, with the USD/JPY falling to 160 on April 26 In addition, the Chinese stock market is attractive to foreign investors due to increased positions and appealing valuations:

Global mutual funds reached a recent low in their positions in the Chinese stock market in January. Since then, as the Chinese macroeconomy has shown signs of stabilization, global investors have been gradually adjusting their positions in China. Global net long positions in China have basically returned to the levels of the summer of 2023.

Valuations are attractive, with the 12-month forward price-to-earnings ratio of the SCI China Index at 9.9 times, 20% lower than emerging market indices. It has returned to the lower end of the range since 2017, with both relative and absolute valuations at key breakthrough/decline levels.

How will the market develop next? Focus on the five major "signals"

Overall, Morgan Stanley believes:

Fundamentals and investment themes in the market have significantly improved compared to last year, focusing on investment in state-owned enterprise reforms and the "going global" theme. The sustainability of the short-term rebound depends on the recovery of fundamentals and the continuity of policy support.

Morgan Stanley finally stated that the market should focus on the five major "signals":

1. Corporate earnings: Chinese companies listed overseas will announce their performance on a large scale in the coming weeks. It should be observed whether there is substantial improvement compared to the fourth quarter and whether there are signs of a slowdown in profit forecast downgrades.
2. Consumer momentum: Overall tourist numbers have shown significant growth, and it is recommended to continue monitoring Morgan Stanley's monthly China consumer Z-score and other high-frequency consumption data.
3. Government policies (with a focus on housing): Any meaningful comprehensive plan aimed at mobilizing existing housing inventory will be a positive market catalyst.
4. Inflation and supply-centered growth framework: It is still crucial to announce/implement more structural reforms and inflationary measures to help economic growth.
5. Geopolitical developments