MORGAN STANLEY: Chinese Stocks Could Go Way Down Or Way, Way, Way Up

The Chinese stock market has been on fire.

The Shanghai Composite index is up an eye-watering 48.6% in just the last six months.

On Monday, the Shanghai Composite index rose another 2.8% despite trade numbers out of China that disappointed, with exports rising 4.7% in November while imports fell 6.7%.

But where the stock market goes from here could be insane.

In a note to clients over the weekend, analysts at Morgan Stanley gave an overview of six tracks they think the market could take from here. And the outcomes are pretty wild.

In one scenario, Morgan Stanley sees the index gaining 453% as price-to-earnings multiples expand to 71.

In another the market falls almost 30%.

Currently, the Shanghai Composite is trading an earnings multiple of 14, which is a 35% discount to its historical average of 21.8.

Morgan Stanley sees the six possibilities for the Shanghai Composite as follows:

  1. A return to the historical P/E of 21.8, giving the market 70% upside from here.
  2. A 1 standard deviation decline from the historical average to a P/E of 9.3, a 28% decline from here.
  3. A 1 standard deviation increase from the historical average to a P/E ot 34.3, giving the market 165% upside from here.
  4. An increase to the historical peak P/E multiple of 71.4, giving the market 453% upside from here.
  5. An increase to the same P/E multiple as the S&P 500’s 18.4, a 42% increase from here.
  6. The current P/E multiple as India’s Nifty index, which is trading at 21.8, the Shanghai’s historical average. So, 70% upside.

Here’s the wild chart from Morgan Stanley with the various possibilities for where the Shanghai Composite could go from here.

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