Morgan Stanley raises its target for the Chinese stock market again, providing three main reasons

Morgan Stanley has once again raised its target for the Chinese market based on three solid reasons: better-than-expected Q4 2024 earnings reports, upward revisions in profit forecasts, and the potential for valuations to further align with emerging market levels.

On March 25, Morgan Stanley analysts Laura Wang and others released a report raising the target points for major Chinese stock indices, increasing the target prices for the Hang Seng Index, Hang Seng China Enterprises Index, MSCI China, and CSI 300 Index to 25,800, 9,500, 83, and 4,220 points, respectively, representing upside potentials of 9%, 9%, 9%, and 8%.

Despite ongoing uncertainties, Morgan Stanley holds a cautiously optimistic view on the prospects for the Chinese market, believing that with improved profit expectations and valuation recovery, the market is likely to see further gains:

Earnings performance exceeded expectations: MSCI China companies reported their first net earnings surprise in three and a half years, with Q4 2024 earnings showing an 8% net surprise (based on the number of companies and weighted earnings), ending a streak of 13 consecutive quarters of disappointing performance.

Profit forecasts raised: Due to the better-than-expected earnings reports and macro improvements, Morgan Stanley has raised its profit growth forecasts for MSCI China to 7% and 9% for 2025 and 2026, respectively.

Valuation gap narrowing: Morgan Stanley expects MSCI China's valuation to align with MSCI Emerging Markets, eliminating the long-term discount, with a 12-month forward P/E forecast of 12.5 times.

Earnings Turning Point: First Earnings Surprise in Three and a Half Years

After 13 quarters of continuous disappointment, the Chinese stock market has finally reached an earnings turning point.

According to Morgan Stanley, the MSCI China Index constituents are experiencing their first quarterly earnings surprise in three and a half years. So far, Q4 2024 earnings reports show an 8% net surprise based on both the number of companies and market capitalization weighting—this is the first time since Q3 2021, ending a streak of 13 consecutive quarters of disappointing performance.

Among major global markets, China has also performed remarkably well, ranking second globally with an 8% net surprise rate, only behind Japan's 13.7%, significantly outperforming Europe, the United States, the overall emerging markets, and the Asia-Pacific region (excluding Japan). This performance improvement is not concentrated in a few large-cap companies but is more evenly distributed, indicating a healthier recovery trend.

Morgan Stanley points out that this breakthrough change is attributed to three main factors:

1. The low base effect after analysts significantly lowered profit expectations over the past few years
2. Companies actively implementing self-rescue measures to enhance profits and shareholder returns
3. The acceleration of technology/AI-related investments and applications

Additionally, based on the revision of profit expectations and improvements in macroeconomic and foreign exchange outlooks, Morgan Stanley has moderately raised its profit growth forecasts for MSCI China for 2025 and 2026 to 7% and 9%, respectively, up from the previous 6% and 9%

Valuation Reassessment: From Discount to Parity

Morgan Stanley predicts that MSCI China is expected to align its valuation with MSCI Emerging Markets, eliminating the long-standing discount. Currently, the recovery of ROE in MSCI China and the easing of geopolitical risks have driven its preliminary reassessment this year (the 12-month forward PE has risen from 10.2 times to 11.6 times), and the discount to MSCI Emerging Markets has narrowed to 6%.

Morgan Stanley believes this discount should disappear for two reasons:

• The earnings results and expected correction trajectory of MSCI China are significantly better than the overall MSCI Emerging Markets.
• In the context of potential U.S. tariff increases, MSCI China is relatively in a more favorable position—based on the reciprocal tariff plan, the tariff space China has imposed on U.S. imports is limited, and only about 3% of MSCI China's revenue is exposed to the U.S. market, the lowest among the top ten emerging market trading partners of the U.S.

Southbound Funds Will Continue to Support Hong Kong Stocks

Southbound funds have become a stable support force for the Hong Kong stock market. In 2024, it set a record of over $100 billion in annual net inflows, and the momentum has been even stronger in 2025, achieving $50 billion in net inflows in less than three months, with an average daily net inflow of $1 billion, more than double the record set in 2024.

Morgan Stanley believes two major factors support the continued inflow of southbound funds:

• The Chinese government has clearly supported the stability and prosperity of the Hong Kong capital market, including a series of supportive measures announced by the central bank.
• The Hong Kong market's greater exposure to the internet and technology provides a more direct choice for investors seeking AI and technological innovation.