Source: China Securities Brokerage Author: Xu Ying

On June 25th, China Securities Brokerage reporter exclusively interviewed Liu Mingdi, Morgan Stanley's chief Asian and Chinese stock strategist, on Morgan Stanley's latest views. Liu Mingdi told reporters that Morgan Stanley releases relevant research reports every year at the end of October to early November on China's stock market forecast for the following year and only makes predictions for the Shanghai Composite Index and the MSCI China Index.

According to Morgan Stanley's forecast, by the end of 2024, the Shanghai and Shenzhen 300 Index's basic scenario expectation is 3,900 points, cautious expectation is 3,500 points, and optimistic expectation is 4,200 points. For the MSCI China Index, the basic scenario expectation for the target is 66 points, the cautious expectation is 56 points, and the optimistic expectation is 70 points.

Morgan Stanley denies the rumor.

As a foreign institution, how does Morgan Stanley view the current capital markets?

"We have the basic, cautious, and optimistic predictions for the Shanghai and Shenzhen 300 Indexes of 3,900 points, 3,500 points, and 4,200 points, respectively, and the basic, cautious, and optimistic expectations for the MSCI China Index's target points are 66 points, 56 points, and 70 points," said Liu Mingdi.

"We give the Shanghai and Shenzhen 300 Index a basic scenario expectation of 3,900 points, and currently, the index is less than 3,500 points, so there is still more than 10% upside potential from the current level," said Liu Mingdi.

In Liu Mingdi's view, the above judgment is based on the recovery of China's mainland stock performance, which brings about the increase in earnings per share. "At present, the Shanghai and Shenzhen 300 Index valuation is relatively cheap, ranging from 10.5 to 11 times the P/E ratio. At the same time, the market consensus expects the growth rate of EPS for the Shanghai and Shenzhen 300 Index to be 13% and 4% in 2024 and 2025, respectively. Morgan Stanley's expectation for EPS is less than 1% lower than the above value. Therefore, with such a cheap valuation and such growth rate, we are relatively optimistic about the A-share market."

According to Liu Mingdi, Morgan Stanley will release the relevant research reports on China's stock market forecast for the following year every year at the end of October and early November. However, this report only makes predictions for the Shanghai and Shenzhen 300 indexes and the MSCI China Index, and does not involve other indexes such as the SSE Composite Index.

Overweight industrial and information technology industries and bullish on high-dividend sectors.

In terms of industry, JPMorgan gives overweight ratings to the industrial and information technology industries.

According to Liu Mingdi, Morgan Stanley's analytical framework includes five cycles, and so far, four of the five cycles in the Chinese market are improving, including the business cycle, performance cycle, real estate cycle, and policy rebalancing cycle, and the bad-debt disposal cycle is still being observed. Industrial and information technology industries, which have good business cycles, performance cycles, and business cycles, are overweight.

Regarding the consumer industry, which is a recent focus of the market, Liu Mingdi stated that it is maintained at a neutral position, focusing on stock selection. "For some leading companies in the consumer industry, especially those that have recently shrunk due to weaker consumption, we are bullish. This is because most consumer industries, such as the food and beverage industry, have weak cycles, and our profits from these stocks mainly come from enterprise performance growth."

Liu Mingdi stated that he is optimistic about the high-dividend sector as a whole and also bullish on growth stocks that have increased dividends and conducted buybacks. "In growth stocks, we pay attention to buybacks and dividend increases, while in high-dividend stocks, we focus on dividend sustainability."

Regarding another hot spot in the market, the outbound sector, Liu Mingdi believes that tariffs are a key factor to consider. "We are more optimistic about three blocks in the outbound related segments: first, categories that are not easily affected by tariffs; second, companies with production outside of China, which are also less likely to be affected by new tariff arrangements; third, companies with relatively low export proportions compared to their peers. We think that the risks of the US election and tariffs in the second half of the year may be focused on at certain times by the market."

Regarding incremental capital in A shares, Liu Mingdi mentioned, "There is nearly 4 trillion yuan in volume for mixed funds in mainland China, but only a little over 20% is allocated to stocks. In the fourth quarter of 2021, mixed funds allocated 28% of their holdings to stocks. Under what type of economic growth environment and inflation expectations will these mixed funds hold more stocks? This is also a concern for everyone. According to our research, local retirement funds and other assets, such as those in Japan, Australia, and India, have significantly stabilized the local markets by increasing their shareholdings in local stocks."

Regarding Hong Kong stocks, Liu Mingdi clearly expressed bullishness on the Hong Kong stock market. "Last year we recommended buying Hong Kong stocks because we believed that Hong Kong stock performance would see a reversal. So this year, we believe that Hong Kong stock performance will have smooth growth, and we expect growth rates of 16% and 13% in 2024 and 2025, respectively."

Regarding industry configuration in Hong Kong stocks, Liu Mingdi expressed bullishness on the internet, mainly media and entertainment and optional consumption industries, as these two industries have significantly improved dividend increases and share buybacks. "With good performance growth and increased shareholder returns, it is easier to increase valuation. In Hong Kong stocks, the rise in stock returns driven by increased shareholder returns is evident."

Editor/Lambor