Morgan Stanley Predicts Further Losses for Chinese Stocks

Morgan Stanley expects further declines in Chinese stocks before their valuations bottom out: weak macroeconomic dynamics and consumption continue to weigh on sentiment. Chinese companies' stocks traded outside mainland China could fall another 10–15% before reaching a historical valuation level of about 8 times the expected earnings for the next 12 months. Mainland China's stocks are likely to undergo a similar revaluation to 10–11 such volumes. This was written by the bank's analysts led by Laura Wang in a Sunday note.

“Concerns over sales driven by a trust tax, pressure on e-commerce, weakening macroeconomics, and increased global volatility have accelerated the correction of the Chinese market,” they write. “Additional events over the past two weeks have further intensified the negative momentum.”

Mainland Chinese stocks are in a bear market: persistently sluggish consumption and weakening policy support cloud growth forecasts. The global pullback of stocks related to artificial intelligence has added pressure, and Hong Kong remains vulnerable to fluctuations in global bond yields and expectations for the Fed's policy trajectory.

Morgan Stanley still favors mainland stocks amid increased market support from the “national team.” Mainland stocks also have “a higher concentration in segments with higher revenue and profit growth – in companies related to artificial intelligence, advanced technologies, and innovations,” the analysts note. The CSI 300 index is trading at 11.6 times the expected earnings for 12 months, Hang Seng at 9.5.

One signal to watch for is significant purchases by the “national team”: historically, the market has bottomed out one to two months after such purchases if accompanied by public commitments from politicians to stabilize stocks, the analysts add.

“The current situation shows that Beijing is now trying to change the marginal balance of supply and demand and establish a bottom without crude intervention,” the note states. “More proactive rhetoric and still significant reserves, judging by historical experience, suggest that the stabilization of the A-share market may become more noticeable now – likely within another one to two months.”