Morgan Stanley analysts project a challenging 2025 for China's equity markets, citing concerns over declining earnings, geopolitical uncertainties, and potential new tariffs.
In a recent note, the bank cautioned, "We anticipate a more volatile China equity market in 2025," highlighting ongoing deflationary trends and persistent macroeconomic challenges.
The report indicates that investor sentiment in the A-share market has already deteriorated, with the Morgan Stanley A-Share Sentiment Index (MSASI) decreasing by 8 percentage points to 77%.
Daily trading volumes in key sectors, including ChiNext and A-shares, have dropped by 10%-17% during the week of November 21-27, as reported by Morgan Stanley.
Furthermore, the bank points out that downward revisions in earnings are accelerating, highlighting the prevailing market uncertainty.
Significant macroeconomic concerns include the potential for a 25% tariff on Chinese imports under the incoming Trump administration.
While exports remain robust due to competitive pricing, the housing market presents mixed signals, showing improved sales alongside low confidence among developers. The Manufacturing PMI is projected to remain stable at 50.1 for November, indicating moderate growth.
Morgan Stanley expects significant pressures on China's equity market, driven by ongoing earnings challenges into 2025, a depreciation of the USDCNY to mitigate tariff effects, increased equity risk premiums due to a more aggressive U.S. policy approach, potential intensification of U.S.-China tensions, and profit-taking after a relatively strong performance year-to-date.
Despite these obstacles, Morgan Stanley favors A-shares over offshore equities, citing their lower sensitivity to geopolitical and currency fluctuations, along with direct liquidity support from the PBOC's swap and re-lending initiatives.
The company's strategy for 2025 emphasizes prioritizing A-shares that demonstrate robust earnings and potential for shareholder returns, while steering clear of stocks that are susceptible to tariffs or supply chain risks. Their Focus List for China/Hong Kong and Thematic List for A-shares showcase recommended trades to effectively navigate this unpredictable environment.