Since the beginning of this year, the Chinese stock market has continued to warm up, experiencing a wave of independent trends. Meanwhile, overseas markets have seen significant fluctuations. In recent Research Reports, Morgan Stanley has upgraded its rating of the Chinese stock market, believing that it has ushered in a structural mechanism change and is expected to continue improving.

We believe now is the best time to recommend global investors to increase their allocation in Chinese Stocks. Recently, Laura Wang, Morgan Stanley's Chief Equity Strategist for China, stated in an exclusive interview with Securities Times · Brokerage China that looking ahead, the core logic of investing in China is changing, with the narrative logic of the Chinese story shifting from a macro perspective to a micro perspective.

There are three major positive factors contributing to the market recovery.

Wang Ying believes that there are three major positive factors behind the recent recovery of the Chinese stock market.

First is the positive corporate operations and enhanced Shareholder return plans. Looking back over the past few years, even when facing numerous challenges in the macro environment, many high-quality Chinese listed companies did not choose to 'lie flat,' but rather remained committed to improving Shareholder returns and have made relentless efforts towards this end. These efforts are reflected in multiple areas, such as strengthening cost control and implementing Share Buyback. Thanks to these initiatives, the capital return rate of the MSCI Chinese Index, which has drawn significant attention from global investors, had already bottomed out and rebounded in the first half of last year, and thereafter began to continuously recover and achieve growth.

Second is the recent symposium for private entrepreneurs that released a clear signal of continued support for the private economy. Companies like Alibaba, which draw global attention, announced they will invest over 380 billion yuan in the next three years to build infrastructure such as cloud computing, AI, and Hardware, showing that business confidence is beginning to warm up.

Third is the recent emergence of the innovative spirit in China's technology sector. Over the past few years, due to the influence of overseas geopolitical factors, global investors' attention toward China's Technology and AI sectors has been very limited. Now, with the debut of DeepSeek, along with breakthroughs by Chinese companies in humanoid robots, intelligent driving, and other high-end fields, global investors are beginning to reassess the investability of China's technology sector and the advantages and potential leadership China possesses in the global competitive landscape.

In summary, the active enhancement of capital investment returns by listed companies, the policy environment providing further care and support for the private economy, and China's breakthroughs in the competitive high-tech field globally are factors that have shown us significant structural improvement in the Chinese stock market on multiple levels. Therefore, we believe now is the best time to recommend global investors to increase their allocation in Chinese Stocks.' said Wang Ying.

The valuation of Chinese assets is very attractive.

This round of revaluation of Chinese assets has come very quickly and intensely. The driving factors include both external factors and the intrinsic factors of the Chinese market itself. On the external side, for example, the increased possibility of a ceasefire in the Russia-Ukraine conflict has reduced geopolitical risks; however, we believe that in this round of asset revaluation, the improvement of intrinsic factors in the Chinese market is more critical." said Wang Ying.

Wang Ying stated that breakthroughs in fields such as AI and technology in China are key. In recent years, restrictions on Chinese technology from abroad have raised concerns in the market about China's lag in the new wave of technological revolution. However, the emergence of DeepSeek has reversed overseas perceptions and strengthened global investors' confidence in the new growth drivers constantly emerging in the future of China's economy, which is the biggest change.

Standing at the present, Wang Ying said that global investors are still actively advised to increase their shareholding in Chinese stocks, "We believe that the Chinese stock market remains extremely attractive, as global investors' allocation to Chinese assets is still at a historically relatively low level, and in this situation, the incremental funds that could come in will be considerable."

Wang Ying further stated that compared to other major stock markets globally, the Chinese stock market is obviously undervalued. For instance, the valuation of the MSCI Emerging Markets Index is 8 percentage points higher than that of the MSCI Chinese Index, and 11 percentage points higher than the Hang Seng Index.

China's scientific and technological innovation is surging.

In terms of sectors, Wang Ying believes that the high-end manufacturing fields such as New energy, Semiconductors, intelligent driving, Siasun Robot&Automation, and AI will continue to be the focus of attention in international competition.

"The innovations and breakthroughs in the tech field such as DeepSeek are not accidental; they are the inevitable result of the long-term investment Chinese enterprises have made in innovation and R&D. In the new era of competitive landscape, we are confident that China has unique inherent advantages, such as a large pool of engineering talent, vast data resources, mature social networks, as well as complete e-commerce and mobile internet ecosystems. These advantages will become more pronounced in the practical application of technology," Wang Ying stated.

In addition, the upstream and downstream industry scale advantages accumulated by China over the years, along with the first mover advantage achieved in green transformation and Intelligent Manufacturing in recent years, will enable China's Industry Chain to maintain strong competitiveness in the next stage of the technological revolution. Wang Ying believes that, "Foreign investment has always paid close attention to China's new economic forms represented by the Internet. Innovations in this round of technology, such as AI, Siasun Robot&Automation, smart driving, and Other high-end Intelligent Manufacturing, will also trigger a continued wave of foreign investment research and interest in China's relevant fields."

In non-technology sectors, Morgan Stanley is Bullish on the media and Entertainment Sector with broad technology application prospects, as well as the e-commerce Sector that is continuously increasing its AI investments and is in the process of transformation.

Core logic is undergoing positive changes.

When discussing the current allocation situation of foreign capital in Chinese Assets, Wang Ying stated, "At present, the foreign capital holdings in Chinese Stocks still have a considerable gap compared to the peaks of 2020 or 2021, and there is considerable room for foreign capital to increase its Shareholding in Chinese Stocks."

Wang Ying observed that passive funds have shown a gradual entrance trend over the past period, mainly due to the impressive performance of the Chinese stock market recently, with Market Cap increases prompting valuation weight rises. However, active funds have yet to intervene on a large scale, perhaps still in the observation and research phase. She indicated that if more signs of macroeconomic improvement emerge in the future, and geopolitical uncertainties further diminish, she firmly believes the Chinese market will become more attractive, drawing international funds to rush in.

In Wang Ying's view, the structural improvement of the Chinese stock market includes several changes: one part has been ongoing for some time, such as the increase in ROI, which has already shown signs of rebound in the first half of 2024; another part is more recent, such as the recent private entrepreneur symposium. She expressed hope that these factors can continue to improve, thereby solidifying the long-term improvement trend.

"Looking ahead, the core logic of investing in China is undergoing changes, namely the narrative logic of the China story is shifting from a macro level to a micro level," said Wang Ying.

Edit/New