MS-2025 China Equity Strategy Outlook

Key Points Industry/Company: - Focus on the Chinese equity market and its outlook for 2025. Core Views and Arguments: 1. Bumpy Ride: The Chinese equity market is expected to face a bumpier ride in 2025 due to a deflationary environment and increasing headwinds from rising geopolitical tensions, including tariffs. 2. Underweight Position: Morgan Stanley moves Chinese equities to a slight underweight within the EM/APxJ context due to earnings growth pressure and rising equity risk premium. 3. A-shares vs. Offshore: Prefer A-shares over offshore due to lower sensitivity to geopolitical uncertainties and currency fluctuations, as well as direct liquidity support from the PBOC. 4. Sector Preferences: Maintain a relatively defensive approach by being overweight telecoms and utilities, and underweight consumer and real estate. Recent upgrades of banks and healthcare from underweight to equal-weight are consistent with this approach. 5. Key Trades: - Buy more A-shares vs. offshore. - Buy stocks with better earnings and shareholder return revision outlook. - Avoid stocks exposed to tariffs and/or supply chain derisking. Other Important Points: 1. Earnings: Expect prolonged disappointment and downward revisions in earnings, with a potential for further downward revisions in the coming quarters. 2. Valuation: Current valuation is fair, but with risk skewed toward the downside due to rising possibility of imminent tariff headwinds and more hawkish stance on China from the US. 3. Liquidity: Expect liquidity outlook to remain in negative territory in 2025 despite sequential improvement. 4. Geopolitical Dynamics: Expect more headwinds in 2025 with a new US administration, including potential tariff hikes and tech restrictions. 5. USD/CNY: Expect further weakening of the USD/CNY, with potential implications for the equity market through negative translational impact on earnings. 6. A-share Market: Continue to prefer A-shares over offshore in the near term due to lower sensitivity to geopolitical uncertainties, currency fluctuations, and direct liquidity support from the PBOC. 7. Sector Allocation: Stay relatively defensive with a preference for Telecom and Utilities, and selected exposure to Materials (Gold, Copper, etc.). Stay cautious on sectors like Real Estate and Consumer. 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