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Investing.com-- Morgan Stanley (NYSE:MS) analysts have upgraded their outlook on Chinese equities, highlighting a structural recovery in return on equity (ROE) and a shift in valuation regimes that could support long-term market gains.
In their latest research note, Morgan Stanley analysts upgraded MSCI China (NASDAQ:MCHI), and Hong Kong’s Hang Seng index to "Equal-Weight", citing improving corporate fundamentals and a more favorable geopolitical landscape.
The report noted that MSCI China’s ROE has improved from 9% in mid-2023 to 11%, with expectations of exceeding 12% by the end of 2026, according to Morgan Stanley.
"We believe a structural regime shift is finally happening within China’s equity market, especially the offshore space, leading to sustainable ROE and valuation recovery." analysts wrote.
Analysts attributed the recovery to corporate self-help strategies, including aggressive cost-cutting, share buybacks, and dividend hikes, alongside a shift in market composition away from macro-sensitive sectors like real estate and consumer staples.
Morgan Stanley also emphasized the impact of China’s recent technological breakthroughs, particularly in AI, which it believes could drive margin expansion and further ROE growth even amid deflationary pressures.
Companies like DeepSeek are seen as leading this charge, positioning China to stay competitive in the global tech race despite regulatory and trade challenges, Morgan Stanley analysts said.
Valuations are expected to benefit from these improvements. Morgan Stanley forecasts MSCI China’s 12-month forward P/E to trade in the 10-12x range, up from the 8-10x band seen since 2022.
This re-rating, combined with clearer regulatory support for private enterprises and easing geopolitical tensions, is expected to reduce China’s equity risk premium and attract more foreign investment, analysts added.
However, analysts maintained their targets for Shanghai Shenzhen CSI 300, citing continued deflationary drag on A-shares compared to the more resilient offshore market.