Morgan Stanley said that driven by a series of stimulus measures and signals announced last week, the Chinese stock market may see a more 'sustained rebound' in the next phase, rather than just a recent sharp increase.

In a report on September 29, Morgan Stanley analysts wrote, "Last week's policy shift... exceeded our expectations, with powerful monetary easing and unprecedented measures aimed at stabilizing and supporting the stock market, preventing a decline in the real estate market."

Analysts predict that the Chinese stock market will rise by at least 10% in the short term, with more to come in the future. They added, "In the next phase, we see the potential for a more sustained rebound - valuations will reach levels during the economic reopening period from November 2022 to March 2023." This is based on broader efforts to achieve growth recovery and eliminate deflation, with corporate earnings improvement being "further clarified."

In this context, Morgan Stanley prefers certain stocks that will benefit from the easing measures. The bank mentioned that these companies include A-share companies with dividend yields and free cash flow 'higher' than the 2.25% loan rate, as well as 'A+H' stocks trading at a discount in Hong Kong.

Morgan Stanley has conducted some stock screening to identify stocks that will benefit. Here are two examples of this screening.

The first item lists six Hong Kong stocks that have risen, with trading prices at a significant discount to the A-share market, as they are expected to benefit from policies of the People's Bank of China.

The second item identifies some stocks with dividend yields currently below 2.25% but free cash flow yields 'significantly' above 4%, compared to borrowing costs of 2.25%. This suggests that these companies may be more motivated to increase dividends, and buy back or increase their holdings.

China's stock market rebounded last week and on Monday after China's central bank announced a series of measures to boost economic growth, including a 50 basis point reduction in the bank reserve requirement ratio. It also announced an interest rate reduction plan. The Central Political Bureau meeting also mentioned for the first time to "promote the stabilization of the real estate market" and called for strengthening the support of fiscal and monetary policies.

Morgan Stanley says it expects China to announce supplementary budgets by the end of October to support consumer spending and local government financing. The bank also expects the Chinese central bank to cut interest rates by another 10 to 20 basis points and reduce reserve requirements by 25 to 50 basis points before the end of the year.

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