Morgan Stanley has upgraded both the MSCI China and Hang Seng indices to equal weight, pointing to what it sees as a structural regime shift in Chinese equities—particularly in the offshore segment. The bank argues that after years of deflationary drag, a recovery in return on equity (ROE) and valuations is taking hold.
Key to this turnaround are three forces:
- improved corporate discipline,
- rising shareholder returns,
- and a shift in index composition toward higher-quality, less macro-sensitive sectors.
Since 2020, dividend yields and buyback activity have steadily increased, while the weight of GDP-exposed sectors in the MSCI China Index has fallen sharply.
Morgan Stanley also sees renewed tech momentum, with firms like AI startup DeepSeek highlighting China’s potential to remain competitive in innovation—offering a path for ROE growth even in a deflationary environment.
The bank has lifted its 2025 year-end targets to
- 24,000 for the Hang Seng,
- 8,600 for the Hang Seng China Enterprises Index,
while maintaining its CSI 300 target at 4,200.
It expects offshore equities to outperform in the near term, given the onshore market’s heavier exposure to deflation-sensitive sectors.
For a more bullish outlook, Morgan Stanley says a clearer macro improvement and easing geopolitical tensions will be required. Still, it believes the groundwork has been laid for a re-rating, with foreign investor positioning still light and valuations poised to normalise.
