Morgan Stanley Ups China Stock Targets by Nearly 10%

With increasing uncertainty surrounding Trump's policies, the American exceptionalism narrative is fading, and U.S. equities have underperformed global markets this year. Investors are seeking opportunities outside the U.S., with China emerging as a key beneficiary

Morgan Stanley has raised its year-end targets for the MSCI China Index, Hang Seng Index, and other major Chinese equity benchmarks by 8-9%.

Their strategists highlight two key reasons for this adjustment:

1️⃣ Earnings Recovery – In Q4, Chinese corporate earnings are expected to surpass forecasts for the first time in 13 quarters. The firm's chief China equity strategists cite aggressive earnings downgrades, ongoing corporate self-help initiatives, and rapid investment in AI and technology as major catalysts.

2️⃣ Valuation Rebound – China's stock market currently trades at a 10.2x forward P/E ratio, significantly below the 11.6x multiple of other emerging markets. Morgan Stanley expects this discount to narrow, driven by healthier corporate earnings trends and limited room for additional U.S. tariff hikes—unless Trump follows through on his campaign promise to raise China tariffs to 60%.

Geopolitical Risks & U.S. Investment Restrictions

While China's exposure to the U.S. market is minimal—MSCI China companies derive only 3% of their revenue from the U.S., the lowest among America's top 10 emerging-market trade partners—geopolitical tensions still pose risks.

On February 21, Trump signed the America First Investment Memorandum, which directs government agencies to draft new rules on foreign investments in key sectors like semiconductors, AI, and quantum technology.

The White House is also considering restrictions on investments in Chinese stocks, including those made through pensions, university endowments, and other institutional funds.

Morgan Stanley notes that while it's too early to assume a major escalation, uncertainty could cause some U.S. investors to temporarily hold off on China investments.

"Any significant investment restrictions could increase the risk premium for Chinese equities," the firm warns.

If the most extreme measures are implemented, the U.S. could ban public-market investments in China altogether, potentially triggering a double-digit percentage selloff in the MSCI China Index.

However, for non-U.S. investors, this could present a strong buying opportunity—similar to 2021, when U.S. restrictions on China Mobile and CNOOC led to attractive entry points.

Macroeconomic Weakness Remains a Concern

Another major risk is China's sluggish economic growth.

Morgan Stanley's economists forecast China's nominal GDP growth at just 3.6% in 2024, with inflation at 0.9%—the lowest since the 2020 pandemic downturn.

Meanwhile, U.S. investors' holdings in MSCI China companies have already fallen from 17% in 2018 to just 11% today.