Morgan Stanley upgrades stance on China stocks in significant shift

Morgan Stanley has upgraded its outlook on offshore Chinese equities, shifting from a bearish to a more optimistic stance, wallstreetcn.com reported on Thursday.

The firm highlighted a structural shift in the Chinese equity market, projecting that technological breakthroughs will drive a more sustainable rally in China's stock market.

After previously being cautious about China's equities, Morgan Stanley's change in view signals a fundamental shift in global investors' attitudes toward Chinese stocks.

The firm is increasingly confident that the return on equity (ROE) trough for MSCI China is in the past, highlighting three key factors supporting the turnaround namely, improved policy sentiment, geopolitical dynamics and renewed confidence driven by technological breakthroughs.

Morgan Stanley has raised its target price for the MSCI China Index to 77 by the end of 2025, up from 63, suggesting a potential upside of around 4 percent from Wednesday's closing price.

The report also forecasts a structural upward adjustment in MSCI China's valuation, with the 12-month forward price-to-earnings ratio (P/E ratio) rising from 8-10 times in 2022 to 10-12 times.

Additionally, several Wall Street investment banks have recently adopted a more positive outlook on Chinese equities following breakthroughs such as DeepSeek's impact on global markets.

Goldman Sachs predicts that the widespread adoption of AI could boost Chinese companies' earnings per share (EPS) by 2.5 percent annually over the next decade.

These improved growth prospects, coupled with potential confidence gains, could increase the fair value of Chinese stocks by 15-20 percent, potentially attracting over $200 billion in portfolio inflows.