Morgan Stanley has revised its stance on Chinese stocks, shifting from a bearish to a neutral outlook after a significant shift in market dynamics, particularly driven by China’s advances in artificial intelligence. Strategists led by Laura Wang now recommend an equal-weight position on the Chinese equity market, increasing their target for the MSCI China Index to 77 by the end of 2025 — a 22% higher projection from their previous target. This suggests an additional 4% upside from the index’s close on Wednesday.
The change marks a notable shift for Morgan Stanley, which had been cautious on Chinese stocks for some time. In contrast to their skepticism during a rally in October, the strategists now see a structural regime shift in China’s equity market, particularly in the offshore market. They are “cautiously more optimistic” about the market’s future performance, highlighting the impact of AI advancements (like those showcased by DeepSeek) and a regulatory shift towards revitalization, as well as buybacks by companies to boost share value.
In addition to boosting their target for the MSCI China Index, Morgan Stanley also raised their targets for the Hang Seng China Enterprises Index (to 8,600 from 6,970) and the Hang Seng Index (to 24,000 from 19,400), though the CSI 300 Index forecast remains at 4,200. The strategists also noted that there is ample room for global investors to engage, given limited foreign inflows into China so far.
Despite the positive outlook, the strategists acknowledged that China’s deflation remains a challenge for onshore stocks, which are expected to gradually catch up to their offshore peers. The recent rally has led to some profit-taking in recent sessions, with benchmarks like the Hang Seng China Enterprises Index and MSCI China seeing slight declines on Thursday. Nonetheless, Chinese stocks have gained more than 20% since their January lows, reflecting a strong comeback.
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