(Bloomberg) — Morgan Stanley cut its price targets for major stock indexes in China and Hong Kong for the second time in three months, as Wall Street became more cautious about the world’s second-largest economy.
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The bank lowered its June 2024 baseline target for the MSCI China Index to 60, down 14% from its previous forecast, according to a research note Thursday. The index risks falling to 40, or a 33% drop from its current level of around 60, in the Morgan Stanley forecast.
The change correlates with Morgan Stanley’s recent downgrade of its forecast for economic growth in China next year, analysts including Laura Wang and Jonathan Garner wrote in the note.
“More significant pressure on earnings due to real estate issues, local government financing tools, deflation and delayed stimulus follow-up: downward revision to our targets driven by combination of much lower earnings outlook in 2023 and lower multiple valuation assumptions.” analysts said
The downgrade follows a targeted 4% reduction in Chinese stocks by Goldman Sachs Group Inc. earlier this week, pointing to lackluster policy responses to addressing the housing slump. Goldman Sachs cut price targets for the MSCI Asia-Pacific Index excluding Japan on Friday, saying that an extension of China’s real estate market pressures to the rest of Asia will slow earnings and returns for the region.
Read more: Goldman Cuts Targets for Asian Equities, Warns of China Spread Risks
MSCI also lowered its June 2024 base targets for the Hang Seng Index, the Hang Seng China Enterprises Index, and the CSI 300 indices to 18,500, 6,450, and 4,000, respectively. In addition, given China’s weighting of around 30% in MSCI EM and MSCI APxJ, price targets for these two indices were also lowered.
A Wall Street bank earlier this month downgraded Chinese stocks to equal weight and recommended investors take profits after a rally spurred by government stimulus pledges. The company overweighted in China in December amid the country’s reopening, but cut targets for key benchmarks six months later due to a delayed recovery in earnings, a weak currency outlook and geopolitical uncertainties.
Real estate stocks have been downgraded due to disappointing sales expectations and hovering default risks for developers, according to Morgan Stanley. The bank continues to favor the consumer discretionary segment due to private consumption’s lower exposure to debt and deflationary issues, and bottom-up corporate self-help to improve profits.
The bank raised utilities to an equal weight from underweight due to their defensive stance during a volatile market, and reduced exposure to IT stocks due to the overall slowdown and geopolitical uncertainty.
(Adds Goldman’s MXAPJ target cutoff in the fifth paragraph.)
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