(March 26): Morgan Stanley strategists raised their outlook for Chinese stocks for the second time in a little more than a month, citing upside for valuations amid an improving outlook for earnings.

“MSCI China is finally on its way — looking set for the first earnings beat after 13 consecutive quarterly misses, while earnings estimate reductions are approaching inflection,” strategists including Laura Wang and Jonathan Garner wrote in a note on Tuesday. “China deserves a valuation on a par with MSCI emerging markets, cutting its long-standing discount,” they added.

Goldman Sachs Group Inc strategists expressed similar views. “China is back” on investors’ radar with room for its rally to expand further, Kinger Lau and Timothy Moe wrote in a note dated on Wednesday. They remained bullish on the market after meeting with investors in Asia, the US and Europe in the past month. 

The MSCI China Index has risen 16% so far this year as a global share gauge has gained about 1%, showing the market may be emerging from its years-long underperformance versus global peers. Tech has helped lead the way, thanks to the artificial-intelligence (AI) potential illustrated by DeepSeek, and by Chinese President Xi Jinping’s warmer tone towards tech leaders. 

The rally has narrowed MSCI China’s valuation discount to the MSCI Emerging Markets Index to 6% from about about 15% at the start of this year, according to data compiled by Bloomberg.

The Hang Seng Tech Index of big Chinese stocks in the sector rallied as much as 1.6% on Wednesday, after falling to the brink of a correction the day before. The Hang Seng China Enterprises Index also rose. 

Fourth-quarter earnings for the MSCI China Index are so far “showing a solid 8% net beat” on both number of companies and the weighted earnings for the first time in three and a half years, according to Morgan Stanley’s analysis. That’s the second-best result among major global equity markets, trailing only Japan, they added. 

The quarterly earnings at some of China’s biggest companies including tech giant Tencent Holdings Ltd and electric vehicle maker BYD Co have either beaten estimates or came in line with expectations.

Meanwhile, the 12-month forward earnings estimate for the MSCI China gauge has increased by 2% this year, according to data compiled by Bloomberg.

The strategists raised their year-end index targets for the Hang Seng Index, the Hang Seng China Enterprises Index, the MSCI China Index, and the CSI 300 Index to levels that imply more than 8% upside for each of the gauges. 

This comes nearly a month after they scrapped their bearish view on Chinese stocks, following Wall Street peers in predicting a more sustainable rally spurred by the country’s AI advances.

Morgan Stanley recommends being overweight on A shares in a Chinese portfolio, while for non-US investors the strategists suggest “buying on dips of high-quality stocks”.

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