China to top global equity market performance in 2023: Morgan Stanley

Morgan Stanley has raised price targets and expects China to top global equity market performance in 2023.

"We see an earlier and stronger growth recovery from 1Q23 amid faster reopening, stronger housing support and tech regulatory easing, lifting 2023 GDP to 5.7 per cent and 12m USDCNY to 6.65. China is set to top global equity market performance in 2023, in our view, with structural improvement on ERP and ROE. Raise price targets and reiterate OW," Morgan Stanley said.

"We remain OW MSCI China and increase our base case end-2023 target from 70 to 80 (+16 per cent upside as of January 5, 2023 close). China equities are poised to lead global equity markets with further notable outperformance of regional (EM overall & Japan) and global (S&P) peers."

The current situation is on par with that in late 2008/early 2009, in our view, with many investors insufficiently exposed to what is likely a key cross-asset portfolio alpha driver for 2023. The prospect of rapidly accelerating GDP and earnings growth from a very low base, as well as reductions in domestic policy risk internally and geopolitical risk externally, are likely to drive a further valuation re-rating near term towards our new forward P/E target of 11.5x (still 0.4 s.d. below 5-year history), the report said.

An ongoing constructive reassessment of China's Equity Risk Premium and a major ROE recovery over the next two years are key structural developments that we expect, but are yet to be fully appreciated by the market, it added.

"We believe the market is under-appreciating the far-reaching ramifications of reopening and the possibility that a robust cyclical recovery can occur despite lingering structural headwinds," Morgan Stanley said.

"We expect GDP growth and consumption to largely move to new trend growth by 2H23, although not return to the pre-Covid path - supported first by excess savings, and later by recovery in jobs and income. Meanwhile, we believe countercyclical easing will stay in 1H23, sustaining strength in public capex, while more housing easing could lead to an earlier stabilization in housing investment. Economic, regulatory and Covid policies are aligned for the first time in four years, likely resulting in stronger spillover from existing and upcoming easing."

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