Morgan Stanley lowered its price targets for major Chinese and Hong Kong stock indexes for the second time in three months, as Wall Street turns more cautious on the world’s second-largest economy.
The bank cut its base-case June 2024 target for the MSCI China index 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 of around 60, in Morgan Stanley’s bear-case outlook.
The change is related to Morgan Stanley’s recent reduction of its forecasts for China’s economic growth into next year, analysts including Laura Wang and Jonathan Garner wrote in the note.
“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 said
The reduction comes on the heels of a 4% target cut for China stocks by Goldman Sachs Group Inc. earlier this week, citing lackluster policy responses to address a property slump. Analysts are lowering their economic-growth forecasts for China this year amid piecemeal stimulus measures and the lack of signs of macro improvement.
Morgan Stanly also cut its base-case June 2024 targets for the Hang Seng Index, Hang Seng China Enterprises Index, and CSI 300 indexes to 18,500, 6,450 and 4,000 respectively. In addition, given China’s weighting of around 30% in MSCI EM and MSCI APxJ, target prices for these two indexes were also lowered.
The Wall Street bank earlier this month downgraded Chinese stocks to equal weight and recommended investors take profit after a rally spurred by government stimulus pledges. The firm was overweight on China in December amid the nation’s reopening, but slashed targets for key benchmarks six months later due to a delayed recovery in earnings, weaker currency outlook and geopolitical uncertainties.
Property stocks were downgraded to underweight on a disappointing sales outlook and hovering developer default risk, according to Morgan Stanley. The bank continues to prefer the consumer discretionary sector given private consumption’s lower exposure to the debt and deflationary issues, and corporates’ bottom-up self-help to improve earnings.
The bank raised utilities to equal weight from underweight for their defensiveness during a volatile market, and cut exposure to information-technology shares given the macro slowdown and geopolitical uncertainty.
(Updates throughout.)