Morgan Stanley downgrades China stocks as regulations kick in — but there's one bright spark

Published Tue, Jan 12 20212:03 AM EST

Key Points

Morgan Stanley reduced its rating for MSCI China, an index by index giant MSCI which includes Hong Kong-listed stocks as well as those listed in the U.S, to equal weight.
The investment bank, however, said it continued to prefer A-shares, or Chinese stocks listed on the mainland, as compared to offshore stocks.

(This story is for CNBC Pro subscribers only.) SINGAPORE — Morgan Stanley has downgraded Chinese stocks, and reduced its rating on a major index which tracks Chinese shares listed overseas and off the mainland in Hong Kong. The investment bank cut its rating for the MSCI China to equal weight, or the same weight as the benchmark. The MSCI China index includes large-cap and mid-cap shares that are listed domestically, as well as Hong Kong-listed stocks and foreign-listed shares like those in the U.S. The investment bank, however, said it continued to prefer A-shares, or Chinese stocks listed on the mainland stock exchanges, as compared to offshore stocks, it wrote in a report released on Monday. Growing regulatory restrictions and continued discord between the U.S. and China continue to weigh on the outlook for China. "We believe that A-shares are much better cushioned against these uncertainties, and therefore it would attract relatively more inflow and re-allocation within investors' China portfolio," Morgan Stanley said. The bank therefore raised its 2021 year-end price target for China's CSI 300 index, predicting an upside of 3%. The index tracks the top 300 stocks traded on the Shanghai and Shenzhen stock exchanges. It added that it's making no changes to its earnings growth forecast for China. "We stay positive about China's strong macro fundamentals given its effective pandemic containment measures, rising share in global manufacturing/exports and rapid pickup of activities in both corporate and private consumption sectors." Morgan Stanley cited these factors for downgrading the MSCI China index. The investment ban on some Chinese firms listed in the executive order by U.S. President Donald Trump last year, which restricted American investments in Chinese companies with alleged ties to China's military. Ongoing regulation in China. Morgan Stanley pointed to the "tension" between the positive outlook for technology and "increasing regulatory uncertainty." That's resulted in recent policy developments in the country, such as strengthened anti-trust and regulatory supervision of Fintech platforms, the investment bank said. "We therefore revise down our valuation forecast for the offshore indices given they are more exposed to the double whammy of geopolitical tension and internet regulatory uncertainty," the bank wrote. It also recommended investors to shift their exposure from Chinese internet stocks to physical consumption stocks. It downgraded Chinese internet stocks to equal weight as well. Over the past few months, Chinese regulators have been growing increasingly concerned about the largely unfettered growth of its technology giants and have proposed draft rules to regulate areas, including data use and antitrust. Last year, China's State Administration for Market Regulation, released draft rules that defined anti-competitive behavior , seen as broadly aimed at technology giants like Alibaba , Tencent , Baidu and others. Regulators have already taken action against Alibaba affiliate Ant Group — which was gearing up for the world's biggest initial public offering in November in Shanghai and Hong Kong until it was abruptly suspended days before its debut . U.S. China tensions have also impacted the outlook for Chinese stocks, forming a double whammy. Citing Trump's executive order, the New York Stock Exchange delisted three Chinese telecommunications giants — China Telecom , China Mobile and China Unicom earlier this week. Some index providers such as FTSE Russell and S & P Dow Jones Indices said they would also remove the three firms from their indices . — CNBC's Arjun Kharpal contributed to this report.

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(This story is for CNBC Pro subscribers only.)

SINGAPORE — Morgan Stanley has downgraded Chinese stocks, and reduced its rating on a major index which tracks Chinese shares listed overseas and off the mainland in Hong Kong.

The investment bank cut its rating for the MSCI China to equal weight, or the same weight as the benchmark.

The MSCI China index includes large-cap and mid-cap shares that are listed domestically, as well as Hong Kong-listed stocks and foreign-listed shares like those in the U.S.

The investment bank, however, said it continued to prefer A-shares, or Chinese stocks listed on the mainland stock exchanges, as compared to offshore stocks, it wrote in a report released on Monday.