MW Morgan Stanley is getting more bullish on China stocks. But there's a key risk, and it's not just tariffs.

By Steve Goldstein

Morgan Stanley lifts year-end target of Hang Seng and other key Chinese stock-market indexes by between 8% and 9%

It's not an ideal time to buy Chinese stocks, right ahead of the next round of tariff announcements coming from the White House, and investors aren't: the iShares MSCI China ETF MCHI is down about 6% from its mid-March highs, even as the fund is still up 17% this year.

Morgan Stanley just lifted its year-end target on MSCI China as well as the Hang Seng HK:HSI and other Chinese stock-market indexes, by between 8% and 9%. Their strategists give two reasons: the first is that earnings from the fourth quarter are going to beat expectations for the first time in 13 quarters. "Aggressive cuts to estimates, diligent corporate self-help efforts, and acceleration of tech/AI-related investment and adoption have all contributed to the change," say strategists led by Laura Wang, the firm's chief China equity strategist, of the improving Chinese corporate earnings environment.

Wang and her team also say that valuations should improve. Right now Chinese stocks are trading on a discount to other emerging markets, at 10.2 times forward earnings estimates vs. 11.6. They expect that gap to close, because Chinese earnings are on a healthier trajectory, and also, there's less scope for tariffs to be added since so many have already been imposed. (That is, assuming President Donald Trump doesn't raise Chinese tariffs to the 60% he threatened on the campaign trail.)

Besides, the MSCI China index has just a 3% revenue exposure to the U.S., the lowest among America's 10 largest emerging-markets trading partners.

But the Morgan Stanley team also point to a different risk coming from U.S.-China tensions. On Feb. 21, Trump signed the America First Investment Memorandum - it's vague but instructs government agencies to begin formulating rules and procedures for implementation. The Committee on Foreign Investment in the U.S. is to consider new or expanded restrictions on semiconductors, artificial intelligence, quantum and other key areas. The White House also is looking at whether to apply those restrictions on publicly traded companies as well as other investment types from sources including pension funds, university endowments and other limited-partner investors.

"We think it is too early to jump to the conclusion that the language in the document implies a major escalation from what's already been put in place, especially for public market equity investment: But it could hold some U.S. investors off for now until more clarity comes, and any major investment restriction could put China's equity risk premium under pressure," they say.

At its strictest, the U.S. could impose a major investment ban involving public equities. The Morgan Stanley team say they would result in a "sizeable setback" to MSCI China of up to low-teen percentage points. Granted, that could represent a nice buying opportunity for non-American investors - restrictions on China Mobile and CNOOC imposed in 2021 were. Also, U.S. investor ownership of MSCI China companies is now down to just 11%, from 17% in 2018.

The other key risk is that the gloomy macro climate persists for longer. Morgan Stanley's economics team is projecting just 3.6% nominal GDP growth in China this year, as well as 0.9% inflation.

The market

After the third consecutive gain for the S&P 500 SPX on Tuesday, U.S. stock-market futures (ES00) (NQ00) leaned lower. The yield on the 10-year Treasury BX:TMUBMUSD10Y rose 2 basis points to 4.33%.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              5776.65    2.89%   -3.00%  -1.78%  11.01% 
   Nasdaq Composite                                                     18,271.86  4.39%   -3.97%  -5.38%  11.99% 
   10-year Treasury                                                     4.333      9.60    7.00    -24.30  13.90 
   Gold                                                                 3022.8     -1.13%  3.11%   14.53%  36.44% 
   Oil                                                                  69.42      3.53%   0.87%   -3.41%  -15.04% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

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Dollar Tree $(DLTR)$ and Chewy $(CHWY)$ are among the companies set to report results.

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The chart

Mark Zandi, chief economist of Moody's Analytics, says his top "recession watch" indicator is when the three-month change in the Conference Board's consumer confidence gauge declines by 20 points - consumers then stop spending and a recession ensues about six months later. After the March data released Tuesday, the three-month decline is 16.6 points. "This indicator isn't flashing recession red, but it is flashing a bright yellow," Zandi said in a social-media message. "The good news is that it is tariffs and other economic policies that have consumers spooked. These policies can be changed and confidence would recover. Recession avoided. The bad news is that this shift in policy course has to happen soon."

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   TSM     Taiwan Semiconductor Manufacturing 
   AMC     AMC Entertainment 
   AMZN    Amazon.com 

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-Steve Goldstein

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March 26, 2025 06:39 ET (10:39 GMT)

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