"These stocks have faced downgrades from Goldman Sachs and Morgan Stanley, but selective stock-picking opportunities remain even in the bear-case scenario."
Analysts at Morgan Stanley and Goldman Sachs have turned more pessimistic on Chinese equities, highlighting that the extensive stimulus measures deployed by the Beijing government have failed to instill confidence among investors.
The main concerns are persistent deflationary pressures, which continue to weigh on the Chinese economy, and geopolitical tensions, expected to escalate given Beijing’s fraught relationship with the incoming U.S. administration under Donald Trump.
True to the rhetoric of his election campaign, Trump is expected to impose significant tariffs on Chinese goods, a move likely to heighten trade tensions further.
There is also widespread skepticism regarding Beijing’s fiscal stimulus efforts, which many experts believe will fall short of revitalizing the Chinese economy.
This sentiment is reflected in the performance of the MSCI China Index, which has declined by approximately 15% from its recent highs.
Morgan Stanley and Goldman Sachs More Pessimistic on Chinese equities
Initial optimism around additional support measures have indeed dissipated after Trump’s election win signaled a more adversarial trade stance toward China, including punitive tariffs.
In this context, Morgan Stanley strategists forecast a low probability that the Chinese government will implement (further) sufficient fiscal stimulus to boost consumption and stabilize the real estate market by 2025.
Their most bearish projections suggest“ stronger headwinds on corporate earnings and market valuation in the coming months.” *
As a result, Morgan Stanley has revised its target for the MSCI China Index to 63 points, slightly below last Friday’s closing level of 63.93 points.
Goldman Sachs has also tempered its outlook, cutting its target for the index to 75 points, down from 84 points previously.
Although Goldman Sachs analysts have reiterated an "overweight" stance on Chinese equities, they caution that the potential imposition of tariffs by the Trump administration could lead to slower earnings growth for Chinese companies.
In addition, Goldman Sachs has downgraded the Hong Kong stock exchange to "underweight," citing vulnerabilities in the real estate and retail sectors.
Worst-Case Scenario: Stock Picking Becomes Critical
Turning to Morgan Stanley’s outlook, chief China equity strategist Laura Wang emphasized the importance of strategy based on the stock picking:
"Stock picking remains important with [the] headwind of tariffs, a weaker currency and persistent deflation".
Morgan Stanley’s worst-case scenario envisions the imposition of steep tariffs on Chinese exports to the U.S., compared to the baseline and best-case scenarios that assume a continuation of the status quo in U.S.-China trade relations.
The worst-case scenario assumes that Beijing would implement fiscal stimulus worth 1 trillion yuan (approximately $140 billion) annually, while EPS growth for MSCI China-listed companies would slow to +3% in 2024 and +5% in 2025.
Under such conditions, Wang recommends focusing on stocks with overweight ratings, dividend yields exceeding 4%, and market capitalizations of over $2 billion.
The top picks in this scenario include:
- Tingyi, a Hong Kong-listed company best known for its Master Kong instant noodle brand.
- China Oilfield Services and Cosco Shipping Energy Transportation, state-owned enterprises listed on the Hong Kong Stock Exchange specializing in the transportation of oil and natural gas.
- Sinotruk, a state-owned heavy truck manufacturer.
Original article published on Money.it Italy 2024-11-18 07:16:58. Original title: Morgan Stanley e Goldman Sachs bocciano questi mercati. Ma con tanto di strategia stock picking: le azioni prescelte
