Morgan Stanley upgrades China stocks, remains underweight on India

Chinese equities rallied and the yuan strengthened past a key level, as the authorities accelerated a shift toward reopening the economy and more investors turned bullish. Meanwhile, the yuan breached the 7 per dollar level, while a gauge of Chinese tech stocks in Hong Kong surged.

Meanwhile, it has upgraded the overall Asia/EM view to overweight alongside a pivot to overweight on Korea and Taiwan away from South/Southeast Asia, downgrading Singapore and Indonesia to equal-weight and India and Malaysia to underweight.

In October this year, Morgan Stanley had downgraded India to ‘underweight’ following its outperformance to other emerging market (RM) peers this year.

Indian stock market has outperformed most emerging markets (EMs). The benchmark indices Sensex and Nifty have surged to record high levels this week as foreign institutional investors (FIIs) doubled down on Indian shares in November 2022.

This is the first time Morgan Stanley has been overweight on China vs. MSCI EM since February 2021. MSCI China has underperformed MSCI EM by 980 bp YTD and by 230 bp since early October.

“Two months on from our upgrade of Asia/EM equity markets, we feel more confident that a new bull cycle is beginning. In recent trading, the MSCI EM index has come to within 3% of our base case target. Reviewing the top-down situation and incoming market and sector developments, we now raise our base case target by 10% to 1,100 from 1,000 (12% upside),and reiterate our overweight call on EM vs. DM equities. Half of our upgrade is related to higher earnings growth and half to a 0.5x point rise in our forecast forward P/E multiple,” the note on Asia EM Equity strategy stated.

Meanwhile, Goldman Sachs Group Inc. predicted that China’s stocks will outperform in 2023, while Bank of America Corp. said it has turned tactically positive.