Morgan Stanley to China stock investors: cash out now in case lacklustre stimulus measures trigger ‘retreat’

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by Zhang Shidong at

Morgan Stanley lowered its rating on Chinese stocks and recommended investors cash out from a rally spurred by the recent dovish signals by policymakers to revive growth, as policy support may fall short of expectations.

The US investment bank cut its recommendation on the MSCI China Index to equal weight from overweight, a rating it had maintained since December after China reopened its economy, analysts Laura Wang and Fran Chen wrote in a report on Wednesday.

The rating downgrade came after the MSCI gauge rose 8.6 per cent through the past eight months to August 1 in US dollar terms, almost matching a 9.6 per cent gain in the MSCI Emerging Markets Index in the same span, according to the report.

Sentiment on Chinese stocks has improved over the past few weeks as a slew of signals from Beijing hinted at more economic-stimulus measures. A July Politburo meeting left out the slogan “housing is for living, not for speculation”, the first omission at the high-level conference in five years. And policymakers signalled an end to the crackdown on the tech industry by acknowledging its contribution to the economy and innovation, while pledging to give more support to the private sector.

“However, investor confidence and conviction level are still very fragile, and investors are still reluctant to preposition in a major way, given that they have been disappointed by rather lacklustre/lukewarm easing measures seen since March,” the report said. “Lack of quick follow-through of actionable easing measures could lead to a retreat from the early recovery in sentiment.”

The coming weeks will test whether the incremental measures will stem a slowdown in growth while market sentiment swings between hopes for policy loosening and impatience or disappointment, it said.

The MSCI China Index dropped 2.5 per cent to 64.06 on Wednesday and is now about 9 per cent shy of Morgan Stanley’s target of 70 by June 2024. The gauge tracks 717 Chinese companies trading on both onshore and offshore markets with a combined valuation of US$2.3 trillion. The biggest constituents are Tencent Holdings, Alibaba Group Holding and Meituan.\

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