Key TakeawaysMorgan Stanley has revised its outlook, now no longer expecting the U.S. Federal Reserve to cut interest rates in December following recent jobs data.The average U.S. 30-year fixed-rate mortgage climbed to 6.26% for the week ending November 20, up from 6.24% the prior week, according to Freddie Mac.U.S. stock markets turned negative, with the S&P 500 (^GSPC) down 0.3%, the Nasdaq (^IXIC) down 0.5%, and the Dow (^DJI) down 0.2%.Nvidia (NVDA) shares also turned negative, experiencing a 1% decline ...

Core Viewpoint - The global market experienced a significant downturn on November 18, 2025, with major indices and assets plummeting, yet UBS and Morgan Stanley maintain a bullish outlook on the Chinese market for 2026, highlighting a stark contrast in market sentiment [2][3]. Group 1: Market Reactions and Predictions - The U.S. Federal Reserve's interest rate cut expectations have dramatically shifted, with the probability of a 25 basis point cut in December dropping from 95% to below 50% due to hawkish signals from Fed officials [2]. - Japan's 10-year government bond yield surged to 1.75%, the highest since 2008, raising concerns about a potential massive fiscal stimulus plan from Prime Minister Fumio Kishida, estimated at 17 trillion yen [2][3]. - Bitcoin fell over 6% within 24 hours, with over 180,000 liquidations amounting to $1 billion, while gold also dropped below $4,000, indicating a rare simultaneous decline in risk and safe-haven assets [7][19]. Group 2: UBS and Morgan Stanley Insights - UBS forecasts a 14% upside for the MSCI China Index by the end of 2026, driven by a projected 10% growth in earnings per share, supported by revenue growth and improved profit margins due to policy changes [8][11]. - Morgan Stanley adopts a more cautious stance, predicting a modest increase for the Hang Seng Index and the CSI 300 Index, emphasizing a "stability-first" strategy with a focus on high-quality tech and dividend stocks [12][13]. Group 3: Structural Adjustments and Market Dynamics - UBS has made significant portfolio adjustments, removing high-dividend stocks and increasing exposure to "outbound" concept stocks, while also favoring sectors like internet, hardware technology, and brokerage [10]. - The A-share market showed a clear shift in focus, with AI application concepts performing well despite overall declines, indicating a movement of funds from high-priced themes to undervalued tech stocks [15][16]. - Domestic tech companies are accelerating AI commercialization, with Baidu reporting AI application revenue of 2.6 billion yuan, reflecting the ongoing innovation-driven profit logic [16]. Group 4: External Factors and Risks - Japan's bond market volatility poses risks to global liquidity, as its net foreign assets stand at $3.7 trillion, potentially impacting global capital flows [18]. - The upcoming Nvidia earnings report is seen as a critical factor for market direction, with concerns about a repeat of the negative market reaction following its previous report [18]. - The correlation between Bitcoin and tech stocks has reached concerning levels, with potential for a chain reaction of sell-offs if Bitcoin continues to decline [19].

Core Insights - Strong non-farm payroll data reduces the risk of rising unemployment, leading to a revised outlook on Federal Reserve interest rate cuts [1] - Morgan Stanley analyst Michael Gapen no longer expects a rate cut in December, now forecasting three rate cuts in 2024 [1] - The final interest rate prediction is maintained at 3-3.25% [1]

Monetary Policy Outlook - Morgan Stanley no longer anticipates a December Fed rate cut [1] - The bank now forecasts three rate cuts in 2025: January, April, and June [1] - Morgan Stanley maintains its terminal rate forecast at 3-325% [1] Economic Indicators - Stronger payrolls data reduces the perceived risk of rising unemployment [1]

Core Insights - Cullen Capital Management's SCCM Value Equity Strategy reported a gross return of 6.9% and a net return of 6.8% for Q3 2025, outperforming the Russell 1000 Value's 5.3% and underperforming the S&P 500's 8.1% during the same period [1] - Year-to-date, the strategy achieved a gross return of 13.0%, compared to Russell 1000 Value's +11.7% and S&P 500's +14.8% [1] Company Performance - Morgan Stanley (NYSE:MS) demonstrated strong performance with a one-month return of 2.64% and a 52-week gain of 23.24%, closing at $162.29 per share with a market capitalization of $259.069 billion on November 19, 2025 [2] - The financial sector, particularly Morgan Stanley, was the largest contributor to the SCCM Value Equity Strategy's relative performance, with Morgan Stanley reporting a 13.6% increase in stock value [3] - Morgan Stanley's Q3 2025 revenues reached $18.2 billion, with an EPS of $2.80, and its Wealth Management division saw a 14% year-over-year revenue growth [4] Sector Insights - The financial sector's strong stock selection contributed significantly to the overall performance of the SCCM Value Equity Strategy [3] - Despite Morgan Stanley's potential, the company is not among the top 30 most popular stocks among hedge funds, with 67 hedge fund portfolios holding its shares at the end of Q2 2025 [4]

Summary of the 2026 China Equity Strategy Outlook Industry Overview - The report focuses on the **Chinese stock market** and its outlook for 2026, following a strong performance in 2025 where major indices like the MSCI China Index and Hang Seng Index rose over **30%** year-to-date [1][10][11]. Core Insights and Arguments 1. **Market Stability and Growth**: - 2026 is expected to be a year of stabilization after the high returns of 2025, with limited upside potential for indices and moderate earnings growth projected at **6%** [2][15]. - The MSCI China Index is forecasted to trade at a forward P/E ratio of **12-13x**, with a target of **90 points** for December 2026, indicating a **3%** upside from the current levels [2][15]. 2. **Valuation and Earnings Quality**: - The report highlights that the valuation re-rating has already occurred, with a **30%** increase in the past year, suggesting limited room for further upward revaluation [12][15]. - Concerns about the sustainability of corporate earnings are raised, as recent earnings reports show a slight deterioration in the number of companies exceeding expectations [11][15]. 3. **Macroeconomic Factors**: - The Chinese economy is expected to face ongoing deflationary pressures, with real GDP growth projected to slow to **4.8%** in 2026 [12][15]. - Global macroeconomic uncertainties, particularly regarding the U.S. economy, could impact China's growth trajectory [14][15]. 4. **Investment Strategy**: - A "barbell strategy" is recommended, favoring high-quality internet and technology leaders while underweighting sectors like real estate, consumer staples, and energy that are negatively impacted by macroeconomic conditions [3][30]. - Key trading ideas include focusing on stocks benefiting from the "anti-involution" policies and those included in the Hong Kong Stock Connect [3][31]. 5. **Liquidity and Capital Flows**: - The report anticipates continued net inflows into both A-shares and offshore markets, supported by policy measures aimed at stimulating consumption and managing real estate inventories [2][28]. Additional Important Insights - **Geopolitical Considerations**: The report notes that a stable geopolitical environment, particularly in U.S.-China relations, could positively influence market sentiment [22][25]. - **Sector Preferences**: There is a strong emphasis on investing in companies with robust fundamentals and growth prospects, particularly in technology and innovation sectors aligned with China's strategic planning [19][30]. - **Scenario Analysis**: The report outlines a wide range of potential outcomes for the Chinese stock market, with optimistic scenarios suggesting a **30%** upside and pessimistic scenarios indicating a potential **34%** decline [25][26]. Conclusion - The outlook for the Chinese stock market in 2026 is characterized by cautious optimism, with a focus on sustainable growth and selective investment strategies. The anticipated stabilization in market performance, combined with macroeconomic challenges, necessitates a strategic approach to capital allocation in the coming year [1][15][19].

Core Insights - Foreign institutions significantly increased their holdings in Chinese assets during the third quarter, with major players like Goldman Sachs, Morgan Stanley, and Merrill Lynch raising their A-share positions by over 20% [1][3] - The China Overseas Internet ETF (KWEB) saw substantial investment from foreign institutions, with its size growing from $6.373 billion at the end of the first half to $9.793 billion by the end of the third quarter [2] Group 1: Foreign Investment Trends - Major foreign institutions such as Bank of America, UBS, Morgan Stanley, and Millennium Management have increased their holdings in the China Overseas Internet ETF, with share counts rising by 215.89%, 35.29%, 24.76%, and 307.44% respectively [2] - As of the end of the third quarter, 3,554 A-share companies had foreign institutional holdings, totaling approximately ¥2.73 trillion, reflecting a 12.4% increase from the previous quarter [3] Group 2: Specific Stock Increases - Citigroup held 3.83 million shares of Alibaba, with a market value of $684 million, showing a quarter-on-quarter increase of 5.63% in shares and 66.45% in market value [3] - JPMorgan held 5.58 million shares of Pinduoduo, with a quarter-on-quarter increase of 17.5% in shares and 48.38% in market value [3] - Citigroup held 350,000 shares of Baidu, with a quarter-on-quarter increase of 6.75% in shares and 64% in market value [3] Group 3: Institutional Insights - Notable foreign institutions such as Morgan Stanley, Goldman Sachs Asia, and Merrill Lynch significantly increased their A-share holdings, with Morgan Stanley's increase exceeding 30% at 33.1% [3] - As of the third quarter of 2025, foreign institutional investors further increased their holdings in Chinese stocks, with the top 40 global investment institutions' holdings rising to 1.1%, the highest level since the first quarter of 2023 [3]

Group 1 - Multiple foreign institutions, including Morgan Stanley and UBS, express confidence in the future development of China's economy and capital markets, maintaining an overweight position on Chinese stocks and raising the target for the Chinese stock index [1][2] - Positive factors supporting the Chinese stock market are expected to continue into next year, with foreign capital anticipated to keep flowing in, particularly into sectors like AI, technology, overseas expansion, and "anti-involution" [1][2] Group 2 - China's economy is projected to maintain steady growth in 2026, supported by policy measures, resilient exports, and a gradual recovery in consumption and public service spending [2][3] - Goldman Sachs has raised its forecasts for China's export growth and real GDP growth, expecting annual export growth of 5% to 6% in the coming years, while the drag from the real estate sector is expected to diminish [2][3] Group 3 - The focus of the stock market is shifting towards substantial improvements in corporate profitability, with UBS predicting another "bumper year" for the Chinese stock market in 2026 [3][4] - Factors such as the development of innovation sectors, support for private enterprises, and continued fiscal expansion are expected to sustain the market, although significant valuation increases are not anticipated [3][4] Group 4 - Foreign capital has been consistently flowing into the Chinese stock market, with $50.6 billion entering in the first ten months of this year, significantly surpassing the total for 2024 [5] - Institutional investors are increasingly confident in China's capabilities in AI, technology, and high-end manufacturing, with many indicating plans to increase their allocation to Chinese stocks in the coming months [5]

Group 1 - Several foreign institutions have raised their target index levels for the Chinese market in 2026, indicating a positive outlook for long-term investment in Chinese assets [1][2] - Morgan Stanley has set the target for the CSI 300 index at 4840 points by December 2026, citing moderate profit growth and stable valuations as key factors [2] - UBS has set the target for the MSCI China Index at 100 points by the end of 2026, predicting inflows from domestic and foreign investors to boost overall valuations [2] Group 2 - There is a clear trend of increasing foreign investment in Chinese assets, with UBS reporting a slight increase in China allocations across various funds in Q3 [3] - Foreign institutions have conducted over 1300 surveys of A-share listed companies since the beginning of Q4, indicating strong interest in the A-share market [3] - Notable foreign institutions like JPMorgan and BNP Paribas have increased their allocations in A-shares, focusing on sectors such as electrical equipment, chemicals, and software services [3] Group 3 - The ongoing improvement of the Qualified Foreign Institutional Investor (QFII) system is expected to enhance the convenience of cross-border investment, supporting the influx of foreign capital [4][5] - The China Securities Regulatory Commission (CSRC) is working on optimizing the QFII system to attract more long-term foreign capital, including measures to streamline approval processes [5] - The CSRC aims to establish a transparent and comprehensive legal framework for foreign investment in the capital market, enhancing the stability and predictability of the investment environment [5]

Core Viewpoint - Multiple foreign institutions are optimistic about the long-term allocation value of the Chinese stock market, with firms like UBS and Morgan Stanley raising their target index levels for 2026 [1][2] Group 1: Target Index Adjustments - Morgan Stanley has slightly raised its target for the CSI 300 index to 4,840 points by December 2026, citing moderate profit growth and stable valuations [1] - UBS has set a target of 100 points for the MSCI China Index by the end of 2026, indicating potential upside from current levels [2] Group 2: Investment Preferences - The technology sector remains a primary investment focus, with UBS and Morgan Stanley recommending overweight positions in high-quality internet and technology stocks [2] - High-dividend assets are also favored, particularly quality state-owned enterprises, due to their stable cash flows and policy support [2] Group 3: Foreign Capital Inflows - There is a noticeable trend of foreign institutions increasing their allocation to Chinese assets, with UBS reporting a slight increase in Chinese positions across various fund types in Q3 [2][3] - Over 1,300 instances of foreign institutional research on A-share companies have been recorded since the beginning of Q4 [2] Group 4: QFII System Enhancements - The QFII system is expected to continue improving, enhancing the convenience of cross-border investments, with recent measures aimed at optimizing access and management [3][4] - The China Securities Regulatory Commission (CSRC) is working on enhancing the legal framework for foreign investment, aiming for a transparent and comprehensive system [4]