Morgan Stanley has upgraded the MSCI China and Hang Seng indices to equal weight, identifying a shift in Chinese equities, particularly offshore. The bank notes a recovery in return on equity (ROE) and valuations after years of deflationary impact.
Key drivers include improved corporate discipline, increased shareholder returns, and a change in index composition towards higher-quality, less macro-sensitive sectors. Since 2020, dividend yields and buyback activity have increased, while GDP-exposed sectors’ weight in the MSCI China Index has decreased.
Momentum In The Tech Sector
The bank sees momentum in the tech sector, indicating that firms like AI startup DeepSeek enhance China’s competitive edge. Morgan Stanley has revised its 2025 targets to 24,000 for the Hang Seng and 8,600 for the Hang Seng China Enterprises Index, with the CSI 300 target remaining at 4,200.
It anticipates that offshore equities will outperform due to the onshore market’s higher exposure to deflation-sensitive sectors. For a more optimistic outlook, clearer macro improvements and reduced geopolitical tensions are necessary, but the groundwork for a re-rating appears established, as foreign investor positioning remains light and valuations are set to normalise.
Morgan Stanley’s recalibration of its stance on Chinese equities marks a departure from years of cautious positioning. The upgrade to equal weight reflects not only an improvement in return on equity and valuations but also a structural shift in how the broader market is aligned. For years, deflationary pressures weighed on corporate performance, but the recovery in return metrics signals that balance sheet resilience and capital allocation strategies are turning a corner. This adjustment acknowledges a tangible shift in sentiment rather than a speculative one.
The resurgence in shareholder returns plays a central role in this assessment. Since 2020, companies have demonstrated greater discipline in capital deployment, leading to higher dividend payouts and a rise in buyback programmes. That, in turn, has reshaped the composition of key indices, reducing exposure to sectors more sensitive to shifting economic cycles. With that backdrop, the MSCI China Index has moved away from traditional GDP-linked industries, tilting towards segments with stronger fundamentals and earnings stability.
Technology And Structural Improvement
Technology is becoming a defining element of the market’s appeal. Morgan Stanley highlights firms such as DeepSeek as key players in strengthening China’s global positioning in artificial intelligence. The increased role of higher-growth industries supports a broader case for structural improvement. Also, momentum in this space supports the bank’s revised targets, which now see the Hang Seng climbing to 24,000 and the Hang Seng China Enterprises Index moving to 8,600 in 2025. Meanwhile, the target for the CSI 300 remains unchanged at 4,200, reflecting a more cautious approach to the domestic market.
Compared to onshore equities, those listed offshore appear better positioned. The reasoning is straightforward: mainland-listed firms remain more exposed to sectors that have felt the deflationary strain more sharply. Without clearer macroeconomic improvements and a reduction in external risks, a more confident outlook would require further confirmation. That being said, positioning among foreign investors remains light, and current valuation levels suggest there is room for normalisation. The structural case for a re-rating is in place, even if broader uncertainties mean that sentiment may take time to fully stabilise.
