Morgan Stanley reckons Chinese stocks will rally 40% this year


Chinese property prices enjoyed a strong 2016, building on the recovery that began a year earlier.

Fueled by prior interest rate cuts, a relaxation in property purchase restrictions and an absence of alternative investments, prices lifted across the board, particularly in the nation’s largest centres.

However, following the introduction of measures to cool price growth in many larger cities late last year, many expect that the boom times for property are now over, at least in the current price cycle.

Recent data released by China’s National Bureau of Statistics suggests that the slow down is already underway.

Jonathan Garner, chief Asia and emerging market equity strategist at Morgan Stanley, is one analyst who certainly thinks that will eventuate, suggesting that as property market conditions slow it will see capital come flooding back to Chinese stocks.

Déjà vu, anyone?

He points to this simple chart to demonstrate the inverse relationship between Chinese property price growth and the performance of the Shanghai Composite, a stock index that contains many of China’s largest listed companies.

It’s likely that many of you may have heard of it following the enormous rally, and equally large bone-jarring fall, it experienced over 2014 and 2015.

Should the recent relationship between the two be maintained in the year ahead, Garner believes the slowdown in the property market will put a rocket under stocks, sending the Shanghai Composite hurtling higher.

“We think there can be further multiple expansion for equities in 2017 after a re-rating began last year,” he says, suggesting that Morgan Stanley’s base case scenario is that the indices trailing price-to-earnings (P/E) ratio will rise to 22 from its current level of 18, sending the index to 4,400 by the end of 2017.

That’s an enormous 40% higher than its current level of 3,160.

Source: Thomson Reuters

It’s a punchy call, undoubtedly, but as has been seen recently in Chinese commodity futures markets, one that is not out of the realms of possibility given a lack of investment alternatives elsewhere.

Perhaps adding to the case for a renaissance in Chinese stocks, Wei Li, China and Asia economist at the Commonwealth Bank, suggested that the recent acceleration in Chinese producer price inflation will likely lead to improving industrial profits.

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