Morgan Stanley has downgraded China — and here’s the rival it prefers

The analysts said domestic Chinese demand has failed to recover convincingly in the post-COVID environment, that core inflation is stuck close to zero, and that there’s no easy way out of the intertwined properly and local government financing burden. Furthermore, the U.S. is likely to slap more restrictions on technology this month.

“All that said, we do not rule out moving back to a more positive stance on China should policy implementation be more aggressive than hitherto and solutions to these structural problems start to fall into place,” they say.

The iShares MSCI China ETF
MCHI
has climbed 35% from its late October low, but is basically flat this year and down 15% from Jan. 27.

Australian stocks were called stretched as earnings forecasts continue to be revised down, household disposable incomes are just now bearing the brunt of the tightening cycle and China’s stimulus does not look particularly large or commodity intensive.

Morgan Stanley also moved Taiwan to equal-weight from overweight, saying valuations are back to mid-cycle levels, and sentiment is no longer depressed. “Taiwan, as we see it as a market, is a structural bull story where we move to the sidelines after significant recent outperformance,” say the analysts.

India, by contrast, was moved to overweight from equal-weight, and its top ranking of 28 different markets. Morgan Stanley says structural reforms that have taken place are bearing fruit, unlocking growth opportunities that were previously stagnant. Multipolar world trends are supporting foreign direct investment and portfolio flows, and India’s reforms underpin a strong capital spending and profit outlook. “We see a secular trend toward sustained superior USD EPS growth versus EM over the cycle, with a young demographic profile supporting equity inflows,” say the analysts.

The iShares MSCI India ETF
INDA
has climbed 5% this year.

Greece also was lifted to overweight on a macro recovery driven by government reforms and stimulus, while Hungary was lifted to equal-weight from underweight due to improved macro conditions and cheap valuations.