Morgan Stanley remains overweight on Japan and India, cuts China outlook further

Investing.com-- Morgan Stanley said it remained overweight on Japanese and Indian stock markets, while further trimming its targets for China amid few signs of improving growth in Asia’s largest economy.

The brokerage said it continued to prefer Japan over emerging markets in Asia, stating that while it had slightly trimmed its year-end targets for Japanese indices, it still expected a 14% upside from current levels, particularly for the TOPIX index.

MS expects an improvement in Japanese inflation, while strong earnings growth is also expected to continue amid improved corporate reforms. 

Japanese markets saw sharp losses at the beginning of August as hawkish signals from the Bank of Japan largely undermined the yen carry trade. The Nikkei 225 and the TOPIX had both plummeted into a bear market, although the have since recouped a bulk of these losses. 

MS expects a broader improvement in risk appetite with lower global interest rate cuts, and sees most developed economies on track for a soft landing. But the brokerage recommended reducing exposure to Asian chip stocks and shifting more towards domestic and defensive sectors. 

MS said it sees a “compelling structural opportunity” in Indian markets, citing strong gross domestic product growth, relative stability in the rupee and a spillover of GDP into company profits. 

The brokerage also cited “secular growth” in the Indian economy and improved domestic retail spending, with both factors being key drivers of Indian stocks. 

India’s Nifty 50 and BSE Sensex 30 indexes were close to record highs, having mostly ducked a recent rout in global stock markets. 

MS cuts China targets on macro concerns, weaker fund flows 

MS downgraded its 2024 targets across the board for Chinese indexes including the MSCI China, Hang Seng and Shanghai Shenzhen CSI 300. 

The brokerage said it saw lower earnings growth and valuations for Chinese stocks in 2024 and 2025, especially as GDP trended below the government’s 5% annual target in the June quarter. 

“Even with some additional policy easing pass-through, which could lead to a modest growth upturn in 4Q, our economics team still thinks full-year growth may still miss the 5% target,” MS analysts said in a note. 

The brokerage said local deflation was persisting longer than expected, while a slowdown in the housing market also continued to weigh on demand.