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CHINA STOCKS HAVE MORE ROOM TO RUN, SAYS MORGAN STANLEY

Chinese stocks are likely to benefit from better corporate governance, improved geopolitical conditions and Beijing's vow to support the private sector, Morgan Stanley analysts said, even as U.S. tariff policies drive volatility in global markets.

The Wall Street brokerage upgraded the MSCI China index .dMICN00000PUS to "equal weight" from "underweight" and said the market is a "micro bottom-up self help story".

Up to last close, the index which rose 16% in 2024, was up 14.2% year-to-date.

Investor optimism around AI stocks and a shift in index weightage away from more deflation impacted sectors support domestic shares despite challenges from domestic deflation and tariffs and non-tariff actions from the U.S., they noted.

Wall Street banks such as Goldman Sachs, Citi and Bank of America have changed their stance on China since the DeepSeek-triggered tech rally, saying the bull case is getting stronger for Chinese stocks due to the AI breakthrough and Beijing's pro-business shift.

"The main risk to our (equal weight) call would be a rapid rise in the China equity risk premium assigned by offshore investors due to escalation of tensions with the US," Morgan Stanley said.

U.S. President Donald Trump announced sweeping 10% tariffs on all Chinese imports, prompting Beijing to retaliate by filing a dispute against Washington with the World Trade Organization.

Morgan Stanley also raised its MSCI Emerging markets index .dMIEF00000PUS target by 9% to 1,200, accounting for the upside from the MSCI China upgrade.

(Kanchana Chakravarty)

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