After last month's excitement over stimulus plans, Chinese stocks now face increasing challenges as earnings have yet to rise and escalating US trade tensions loom. “Stock picking remains important given the headwinds of tariffs, currency weakness and ongoing deflation,” Laura Wang, senior China equity strategist at Morgan Stanley, and a team said in a report Thursday. As for investment options, she pointed to the company's survey of Chinese stocks that are already covered by the investment bank's analysts. The company examined which stocks could outperform depending on any of the three scenarios revealed. The bear's condition alone was the reason for the significant US tariffs and restrictions. The base and bottom-up cases assumed the status quo in US-China relations. The bearish case also forecasts 1 trillion yuan, or $140 billion, in fiscal stimulus annually and MSCI China's earnings per share growth of 3% this year and 5% next year. Morgan Stanley's stock basket only includes overweight names with a dividend yield higher than 4% this year. They also have a free cash flow yield of more than 4% from 2023 to 2025 and a market capitalization of more than $2 billion, among other factors. Companies listed at Morgan Stanley should not be at a disadvantage due to Republican politics and supply chain diversification. The only consumer name to appear on the list was Tingyi, a Hong Kong-listed company that owns the Master Kong instant noodles brand. The company is also the exclusive manufacturer and seller of PepsiCo in China. Tingyi's net profit in beverages rose nearly 26% in the first half of 2024 compared to last year, while net profit in instant noodles rose 5.4%. Morgan Stanley expects Tingyi's earnings per share to grow 12% this year and 11% in 2025. Other Chinese companies that made Morgan Stanley's bearish basket include two state-owned energy stocks: drilling company China Oilfield Services and specialist Cosco Shipping Energy Transportation. In oil and natural gas shipping. Both stocks are listed in Hong Kong, as is the name of the only industrial company on the bearish list, Sinotruk. The truck manufacturer is also state-owned. Morgan Stanley expects the Chinese oilfield services company to be able to increase earnings per share by 41% this year and 33% next year, while Cosco Shipping Energy Transportation could see its profits rise by 33% this year, before slowing to 16% growth. Next year. Sinotruk's profits could grow 18% this year and 17% next year, according to Morgan Stanley estimates. Morgan Stanley's Wang said MSCI's China components were on track to post their 13th straight quarter of earnings, despite a recent improvement in economic data. “We expect further downward earnings revisions amid continued deflationary pressures and geopolitical uncertainties until more policy clarity emerges.” Asian equity fund managers have modestly increased their exposure to China since the stimulus announcements in September, Morningstar strategist Claire Liang said in a phone interview on Friday. “But many managers said whether this rise can continue will depend on whether policies can achieve real results,” Liang said in Mandarin, translated by CNBC. Far from stabilizing the economy, she said managers are looking to see if corporate profits can recover. The release of October data in China on Friday highlighted the slow economic recovery despite the latest barrage of stimulus announcements. Industrial production missed expectations and investment in fixed assets grew slower than expected as the decline in real estate investment deepened, albeit as new home sales moderated their decline. Only retail sales beat expectations with 4.8% growth. For China's heavily export-reliant economy, the threat of US tariffs has risen in just the past two weeks with the Republican Party in control of the US Congress and President-elect Donald Trump filling his cabinet with China hawks. Morgan Stanley's US policy team expects Trump to impose tariffs soon after taking office, potentially hitting Europe and Mexico along with Chinese imports. While China is better positioned than it was six years ago to stave off the effects of targeted tariffs, analysts said global tariffs on US imports would hurt China as much as targeted tariffs did in 2018.
Trending
- Stocks, news, data and earnings
- Biden allows Ukraine to use American weapons to strike Russia
- SpaceX rival TEC raises $160 million for a reusable space capsule
- Why do so many young people in the United States still live with their parents?
- McDonald's and Starbucks aim to improve
- Morgan Stanley picks Chinese stocks to weather worst-case scenarios in US tensions
- Elon Musk backs Trump transition co-chair Howard Lutnick for Treasury Secretary
- Earnings from Nvidia, TJX, and Walmart
Morgan Stanley picks Chinese stocks to weather worst-case scenarios in US tensions
