Morgan Stanley picks China stocks to beat market volatility — and names two with 60% upside

Published Mon, Aug 22 20227:14 PM EDT

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

Morgan Stanley is betting on a few Chinese stocks — such as technology and materials companies — to ride out what's expected to be a period of high market volatility. The investment firm prefers mainland China stocks to those listed offshore, equity strategist Laura Wang said in an Aug. 15 report about the bank's positioning in Chinese equities in the third quarter. Mainland China's CSI 300 index has outperformed the MSCI China stock index by 20 percentage points since mid-November, she said. MSCI China's top holdings are Chinese stocks listed mostly in Hong Kong, such as Tencent and Alibaba . Wang noted how the MSCI China index is most sensitive to sectors affected by regulatory uncertainty, and is experiencing its longest bear market in its 20-year history. She expects the property market slump , downward earnings revisions, potential Covid outbreaks and uncertainty around U.S.-China tensions to likely keep market volatility elevated. In the interim, she said the firm recommends remaining overweight on materials companies. "We also like information technology, which enjoys a continuous policy tailwind, and Utilities for defensiveness," Wang said. For each of those three sectors, CNBC selected the stock on the bank's China/Hong Kong focus list with the greatest potential upside to undisclosed price targets as of Aug. 11, per Morgan Stanley's analysts. All three are rated overweight by the investment bank. Technology: Glodon Potential upside: 59.8% Glodon is a construction software company with products that include building design and cost estimation tools. The company claimed net profit attributable to shareholders doubled last year to 661 million yuan ($97.3 million). The Shenzhen-traded shares are down by more than 10% over the last six months, but have posted gains over the last three months. Materials: Ganfeng Lithium Potential upside: 58.8% Ganfeng Lithium is a giant supplier of lithium for electric car batteries. The company said its net profit attributable to shareholders soared by 410% last year to 5.23 billion yuan ($770.21 million). However, the stock plunged this year. The company's Hong Kong-listed shares are down by about 24% over the last three months. Ganfeng and Glodon have both outperformed the MSCI China Index since Morgan Stanley added them to their focus list, according to the bank's report. Utilities: Kunlun Energy Potential upside: 47.3% Kunlun Energy focuses on natural gas processing and transport. The company is controlled by state-owned China National Petroleum Corporation. Kunlun said its profit attributable to shareholders surged by nearly 280% to 23.02 billion yuan last year. The company's Hong Kong-traded shares are down by about 12% over the last three months. — CNBC's Michael Bloom contributed to this report.