After US$382 billion China stock rout, Nomura and Morgan Stanley join Goldman in cutting bullish targets amid economy, earnings hurdles

Nomura, Morgan Stanley cut their upside targets for MSCI China Index as stocks struggle for near-term catalysts
Index has US$382 billion in market value, after sliding 19 per cent from this year’s peak on January 27

Nomura and Morgan Stanley are turning less bullish on the outlook for Chinese equities, joining Goldman Sachs in cutting their market valuation and upside targets as the economy muddles through post-pandemic recovery.

Japan’s biggest brokerage cut its year-end target for MSCI China Index to 67 from 75.3, according to a June 4 report to clients, following several weak economic reports in April and May, intensifying competition among tech companies and simmering geopolitical tensions.

Morgan Stanley now expects the MSCI China Index to reach 70 by June 2024 in what appears to be the first dial-back since January. The Wall Street firm had previously targeted the index to reach 80 by end-2023 on the back of reopening optimism.

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The two downgrades added to a chorus of downbeat views on China’s recovery momentum since Beijing started abandoning its zero-Covid policy in November. A slump in export demand and China’s spat with the West, from semiconductor to military issues, have prompted money managers to dump Chinese assets, eroding the yuan to near the weakest against the US dollar since November.

“Sentiment towards China remains fragile with investors continuing to be concerned about the sustainability of China recovery, in the absence of more stimulus and property market recovery,” Nomura analysts including Chetan Seth said in the report. “Our targets still suggest China should outperform by the end of this year but near-term catalysts are lacking.”

Goldman cuts China stock targets again as recovery falters, funds go bearish

Chinese stocks listed in Hong Kong logged successive losses in April and May to drag the Hang Seng Index down by more than 20 per cent from its January 27 peak, briefly slipping into bear-market territory. The MSCI China Index, which tracks 715 companies listed at home and abroad, has lost 19 per cent from the same peak in a US$382 billion sell-off.

The correction has unsettled investors and prompted them to allocate more money into other performing markets in the region such as India and Japan. Hedge funds have reduced their China positions over the past four months to 9.1 per cent, from as high as 13.3 per cent in January, according to Goldman Sachs.

China’s loss is Japan’s gain as investors turn to Asia’s other markets

Goldman last week cut its 12-month target for MSCI China Index to 70 last week from 80, a second cutback in as many weeks, after trimming its earnings forecasts and market valuation. Morgan Stanley has now reduced its overweight exposure to China to 25 basis points from 50 to reflect the heightened risk, it added.

Like Goldman, both Nomura and Morgan Stanley strategists also preferred stocks listed on mainland exchanges to those traded in Hong Kong, citing better earnings growth and onshore liquidity, as well as state support for certain promoted sectors.

“We also expect policymakers [in China] to step up easing measures around late June or early July and a consumption-led recovery to broaden out in the second half of 2023,” Laura Wang, top China strategist at Morgan Stanley, said in the report.