Morgan Stanley analysts foresee a turbulent year for China’s equity markets in 2025, citing downward earnings pressures, geopolitical risks, and potential tariffs. In a note released Friday, the bank stated, “We still expect a more bumpy China equity market in 2025,” emphasizing ongoing deflationary trends and macroeconomic headwinds.
Investor sentiment in the A-share market has already begun to weaken, with the Morgan Stanley A-Share Sentiment Index (MSASI) dropping 8 percentage points to 77%. Daily trading volumes in key segments, including ChiNext and A-shares, have declined by 10% to 17% between November 21 and 27.
The bank noted that downward revisions to earnings forecasts are accelerating, reflecting increasing market uncertainty. Major concerns include the possibility of a 25% tariff on Chinese imports under the incoming Trump administration.
While exports remain strong due to competitive pricing, the housing market presents mixed signals, showing improved sales but dampened developer confidence. The Manufacturing PMI is expected to remain steady at 50.1 for November, indicating moderate expansion.
Morgan Stanley predicts that front-loaded pressures will weigh on China’s equity market, driven by persistent earnings weakness, a depreciation of the USDCNY to mitigate tariff impacts, higher equity risk premiums amid a more hawkish U.S. policy stance, and potential escalations in U.S.-China tensions. Additionally, profit-taking may follow a relatively strong year-to-date performance.
Despite these challenges, Morgan Stanley favors A-shares over offshore equities, citing their reduced sensitivity to geopolitical and currency fluctuations and direct liquidity support from the PBOC’s swap and re-lending programs.
The firm’s strategy for 2025 focuses on A-shares with strong earnings and shareholder return potential while steering clear of stocks exposed to tariffs or supply chain vulnerabilities.
