After giving up on bearish views, Morgan Stanley continues to be bullish on the Chinese stock market: foreign capital has not yet truly participated, and they still have significant allocation space

Morgan Stanley continues to express an optimistic outlook on the Chinese stock market after abandoning its bearish stance.

Laura Wang, Chief Equity Strategist for China at Morgan Stanley, stated in an interview with Bloomberg on the 21st that although A-shares and Hong Kong stocks have seen significant increases since the end of January, foreign capital has not yet truly participated in this round of rebound, leaving ample room for allocation. She said:

"Investors' allocation to China is still severely insufficient. Therefore, there is still a lot of room for them to increase their allocation from now on."

According to Morgan Stanley's analysis and data, the main incremental funds driving this rebound come from "southbound trading," which refers to mainland funds flowing into the Hong Kong market through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect. So far this year, as much as $25 billion has flowed into Hong Kong. In addition, some regional and China-focused funds have also actively participated in this round of rebound.

However, it is worth noting that actively managed funds or passive funds based in the United States or Europe have not yet truly participated in this round of rebound. This means that a large amount of potential foreign capital is still on the sidelines.

"If you look at active or passive funds in the U.S. or Europe, they have not really participated in the geopolitical changes, breakthroughs in China's technological innovation, or the market rebound triggered by Monday's symposium."

On the 20th, Laura Wang's team published a shift to a bullish outlook on the Chinese stock market, expecting the MSCI China Index to rise another 4%. The report stated that the Chinese stock market (especially the offshore market) has finally undergone a structural qualitative change, making it more certain than the rebound in September last year that the recent improvement in the MSCI China Index can be sustained.

Previously, Morgan Stanley had maintained a cautious stance on Chinese stocks. Some analysts pointed out that Morgan Stanley's upgrade this time represents a significant shift, indicating that global investors' attitudes toward the Chinese market may be undergoing a fundamental change. Even in October, when China's monetary stimulus measures triggered a surge in the stock market, Morgan Stanley hardly changed its stance—only reducing its underweight position.

Morgan Stanley believes that several key factors are enhancing the attractiveness of the Chinese market. First, the easing of geopolitical tensions has injected confidence into the market. Second, breakthroughs in China's technological innovation, particularly the strong signals released during the private enterprise symposium held on February 17, have further strengthened the market's long-term growth potential.

Laura emphasized that these positive changes are happening very rapidly, and many investors' allocations to the Chinese market are still severely insufficient. Therefore, there is significant room for foreign capital to increase its allocation to the Chinese stock market in the future