After excitement over last month’s stimulus package, Chinese stocks now face growing challenges as profits have yet to pick up and as U.S. trade tensions intensify. “Stock picking remains important amid tariff headwinds, currency weakness and persistent deflation,” Laura Wang, chief China equity strategist at Morgan Stanley, and her team said in a note on Thursday. For investment picks, she pointed to the firm’s survey of Chinese stocks already covered by investment bank analysts, which screen stocks that are likely to outperform based on which of the three scenarios are only bearish. leading to significant tariffs and restrictions in the U.S. The base case and bull case assume the current state of Sino-U.S. relations. The pessimistic scenario also predicts 1 trillion yuan ($140 billion) of fiscal stimulus per year, Morgan Stanley Capital said. International (MSCI) China earnings per share will grow 3% this year and 5% next year. Morgan Stanley’s basket of bear stocks only includes overweight stocks with dividend yields above 4% this year, among other factors. The companies also have free cash flow yields above 4% from 2023 to 2025 and market capitalizations above $2 billion. These companies are prohibited from appearing on Morgan Stanley’s stock list and are disadvantaged by Republican policies and supply chain diversification. The only consumer brand on the list is Master Kong, a Hong Kong-listed company that owns the instant noodle brand Master Kong. The company is also the exclusive manufacturer and seller of PepsiCo in China. Master Kong’s beverage net profit increased by nearly 26% in the first half of 2024. Instant noodles’ net profit increased by 5.4%. Morgan Stanley expects Tingyi’s earnings per share to grow by 12% this year and 11% by 2025. Both stocks are listed in Hong Kong, and China National Heavy Duty Truck is the only one included. Industrial stocks on the bear market list. The truck maker is also state-owned. Morgan Stanley expects COSL’s earnings per share to grow 41% this year and 33% next year, while COSCO Shipping Energy Transportation’s earnings per share will grow this year. Growth is 33%, and will slow to 16% next year, according to Morgan Stanley estimates, China National Heavy Duty Truck’s profits will grow 18% this year and 17% next year, despite recent economic data. Improved, but Morgan Stanley’s China constituents are expected to post lower-than-expected profits for the 13th consecutive quarter. “Amid continued deflationary pressures and geopolitical uncertainty, we expect further earnings revisions until there is more clarity on policy.” until. Morningstar strategist Claire Liang said in a phone interview on Friday that Asian equity fund managers have slightly increased their exposure to China since the stimulus package was announced in September. “But many managers said, Whether this rebound can be sustained will depend on whether policies can see real results,” Liang said in Mandarin (the article was translated by CNBC). In addition to stabilizing the economy, managers are also concerned about whether corporate profits can recover, she said. China’s October data released on Friday highlighted the sluggish economic recovery despite a series of recently announced stimulus measures. Industrial production fell short of expectations. Although the decline in new home sales narrowed, the growth rate of fixed asset investment was still lower than expected as the decline in real estate investment increased. Only retail sales grew by 4.8%, exceeding expectations. For China’s export-intensive economy, the risk of U.S. tariffs has only risen in the past two weeks as Republicans took control of the U.S. Congress and President-elect Donald Trump added China hawks to his cabinet. Morgan Stanley’s U.S. policy team expects Trump to impose tariffs soon after taking office, potentially hitting Europe and Mexico along with Chinese imports. Although China is better able to withstand the impact of targeted tariffs than it was six years ago, analysts say global tariffs on U.S. imports will hit China just as hard as the impact of targeted tariffs in 2018.
