Morgan Stanley believes that structural improvements in the Chinese stock market are gradually emerging. Factors such as the bottoming out of corporate ROE, improving earnings expectation cycles, valuations at relatively low global levels, strengthened policy support, and advancements in industrial upgrading and technological innovation all provide positive catalysts. The Chinese stock market is reaching a subtle turning point, signaling optimism.
According to Baidu News, Morgan Stanley’s latest research report, “China Equity Strategy Mid-2025 Outlook: Golden Dawn Amid the Gloom,” notes that despite persistent macroeconomic challenges, the Chinese stock market is showing signs of structural improvement. The report highlights several key positive drivers: the recovery of return on equity (ROE) among Chinese companies, a continuously improving investment environment, and the nearing end of the earnings downgrade cycle. Morgan Stanley also emphasizes China’s growing capabilities in technological breakthroughs, particularly its leading position in AI competition, which offers structural opportunities for investors, especially in tech and manufacturing upgrades. ROE recovery, improved earnings prospects, AI leadership, and attractive valuations… Morgan Stanley’s data indicates that MSCI China’s ROE effectively bottomed in the second half of 2024 and is expected to gradually recover in the coming years. This improvement stems from two factors: proactive corporate self-help measures and enhanced shareholder returns, as well as reduced sensitivity of offshore Chinese equities to macroeconomic conditions and deflation. After a prolonged adjustment, earnings expectations for Chinese stocks are finally turning around. The report shows that MSCI China is ending a 13-quarter earnings downgrade cycle, with in-line performance expectations emerging for the first time in Q4 2024 and continuing into Q1 2025, marking an improvement in earnings revision cycles. Notably, high-quality companies (focused on technology and shareholder returns) are gaining a larger share in China’s offshore equity market, elevating overall market quality. While fundamentals show signs of improvement, valuations remain attractive. As of May 19, 2025, MSCI China trades at 11.1x 12-month forward P/E, a ~10% discount to MSCI Emerging Markets and a discount to global major equity markets, offering long-term investors a reasonable entry point. Since last year, the Chinese government has rolled out incremental policy packages, significantly bolstering support for the private sector. The report suggests these policy adjustments are likely to create a more favorable operating environment for businesses, particularly in technology and innovation-driven sectors.The report data also indicates that China’s AI models are catching up in performance and demonstrate significant cost-effectiveness advantages, which will enhance the global competitiveness of Chinese enterprises. The report states that each industrial upgrade cycle has elevated China’s importance in the world economy. China’s manufacturing sector has laid a solid foundation for the next upgrade cycle, with advantages in supply chain scale, adaptability, automation, rapid AI adoption, green transformation, and talent pool.
Meanwhile, the report acknowledges that geopolitical uncertainty remains a risk factor requiring attention. However, analysts also note that MSCI China’s revenue exposure to the U.S. market is limited, at less than 3%, the lowest among the top ten emerging market trading partners of the U.S. The report suggests that this relatively low dependency mitigates the direct impact of geopolitical risks to some extent. The above insights are sourced from Baidu. For more detailed analysis, including real-time interpretations and frontline research, consider subscribing to the [Baidu Annual Membership], jointly developed by Baidu and ZhiBao. Risk Disclosure and Disclaimer: The market carries risks, and investments require caution. This article does not constitute personal investment advice nor considers individual users’ specific investment objectives, financial situations, or needs. Users should evaluate whether any opinions, views, or conclusions herein align with their particular circumstances. Investments made accordingly are at the investor’s own risk.
