Morgan Stanley cut its price targets for major Chinese and Hong Kong stock indexes for the second time in three months on the back of lower growth forecasts.
(Bloomberg) — Morgan Stanley cut its price targets for major Chinese and Hong Kong stock indexes for the second time in three months on the back of lower growth forecasts.
The base-case June 2024 target for the MSCI China index was cut to 60, down 14% from its earlier projection, according to a research note Thursday. The index risks slumping to 40, or a drop of 33% from its current level around 60, in the bank’s bear-case outlook.
The change is related to Morgan Stanley’s recent reduction in its forecasts for China’s economic growth into next year, wrote analysts including Laura Wang and Jonathan Garner.
“More significant earnings pressure due to property sector issues, local government financing vehicles, deflation and delayed stimulus follow-through: the downward adjustment to our targets is driven by a combination of much lower earnings expectation in 2023 and a lower valuation multiple assumption,” the analysts wrote in the report.
The Wall Street bank also slashed base-case June targets for the Hang Seng, Hang Seng China Enterprises Index, and CSI 300 indexes to 18,500, 6,450 and 4,000 respectively. In addition, given China’s circa 30% weight in MSCI EM and MSCI APxJ, target prices for these two indexes were also lowered.
The move comes after Morgan Stanley earlier this month downgraded Chinese stocks to equal weight and recommended investors take profit after a rally spurred by government stimulus pledges.
Property stocks were downgraded to underweight on a disappointing sales outlook and hovering developer default risk, according to Morgan Stanley. It continues to prefer consumer discretionary given private consumption’s lower exposure to the debt and deflationary issues, and corporates’ bottom-up self-help to improve earnings.
Market sentiment remains cautious near term amid piecemeal stimulus measures and lack of signs of macro improvement, the analysts added.
The bank raised utilities to equal weight from underweight for its defensiveness during a volatile market, and cut exposure to information technology given macro slowdown and geopolitical uncertainty.
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