(Hong Kong) Morgan Stanley strategists have shifted their stance on Chinese equities, moving from long-standing scepticism to cautious optimism. This notable pivot aligns with Wall Street peers, as expectations grow for a sustainable rally driven by advancements in artificial intelligence and regulatory reforms.

The firm's strategists, led by Laura Wang, now recommend an equal-weight position on Chinese stocks, forecasting the MSCI China Index to reach 77 by the end of 2025—a 22% increase from their earlier target and 4% higher than Wednesday's close. The index, which entered a bull market earlier this month, reflects growing investor confidence in the Chinese market.

"This marks a structural regime shift within China's equity market, particularly in the offshore sector," the strategists wrote in a note on Wednesday. "We are more convinced now than during last September's rally that the recent improvement in MSCI China's performance can be sustained."

The upgrade signals a fundamental change in sentiment from Morgan Stanley, which had previously been hesitant to turn bullish on Chinese equities, even during October's stimulus-fuelled rally. The shift underscores a broader re-evaluation of China's market potential as global investors respond to the country's technological advancements and President Xi Jinping's conciliatory approach to the private sector.
Tech stocks, buoyed by breakthroughs in artificial intelligence by firms such as DeepSeek and a regulatory transition from "rectification to revitalisation," have been at the forefront of the resurgence. Goldman Sachs recently raised its MSCI China Index target to 85, while JPMorgan Chase & Co. and UBS Group AG have also issued upbeat projections.

Morgan Stanley's note highlighted share buybacks, improving corporate governance, and AI capabilities as key drivers behind the upgrade. "There should be ample room for global investors to engage," the strategists noted, adding that limited foreign inflows suggest untapped potential.

Despite the optimism, Chinese equities have experienced profit-taking in recent sessions following their strong performance this year. The Hang Seng China Enterprises Index fell 1.3% on Thursday morning in Hong Kong, while the MSCI China Index also declined. Both benchmarks, however, remain over 20% above their January lows.

Morgan Stanley raised its target for the Hang Seng China Enterprises Index to 8,600 from 6,970 and the Hang Seng Index to 24,000 from 19,400. The forecast for the CSI 300 Index remains unchanged at 4,200. While deflationary pressures may weigh on onshore stocks in the short term, the strategists expect them to gradually catch up with offshore counterparts.

Source: Dimsumdaily.HK