"Big Banks" Morgan Stanley raises the target forecast for the Hang Seng Index, aiming for 24,500 points by June next year

Morgan Stanley published its mid-year strategy report for the Chinese market, stating that due to structural improvements, such as return rates, recent corporate earnings, and a partial easing of geopolitical tensions, it has decided to raise its target for the Chinese capital market index. It predicts a strengthening of the RMB exchange rate, and the currently low allocation of investors is also favorable for the market. However, ongoing deflationary macro challenges lead the bank to maintain a "market perform" rating for the Chinese market, preferring Chinese concept stocks and H shares over A shares.

The bank has raised its "base case" forecast for the Hang Seng Index, expecting a target of 24,500 points by mid-next year (the bank had predicted a "base case" for the Hang Seng Index of 20,800 points by the end of this year in mid-April). This corresponds to a forecast price-to-earnings ratio of 10.6 times in June next year, with an expected earnings growth of 5% from a top-down approach.

For the "bull case" forecast for the Hang Seng Index, the bank expects a target of 28,000 points by mid-next year, corresponding to a forecast price-to-earnings ratio of 11.5 times in June next year, with an expected earnings growth of 7% from a top-down approach. For the "bear case" forecast, the target is set at 18,300 points by mid-next year, corresponding to a forecast price-to-earnings ratio of 8.2 times in June next year, with an expected earnings growth of 3% from a top-down approach.

Morgan Stanley stated that based on ongoing structural improvements and the latest positive developments in tariffs and earnings, it has raised its target for the Chinese stock market index: 1) Return rates have bottomed out and valuations are adjusting upwards, especially in the offshore market, due to corporate self-rescue and increased shareholder returns; 2) Confirmation of support from the mainland government for the private sector; 3) The emergence of leading technology companies in artificial intelligence, technology, and smart manufacturing that can actively participate in and lead global technological competition. Additionally, the partial easing of tariff negotiations between the U.S. and China, along with a stabilization in the trend of earnings revisions in the Chinese stock market, has led the bank to see further upside potential in earnings and valuations. The significantly low allocation "positions" of global investors and the strengthening of the RMB also contribute positively.

In the short term, compared to the mainland A-share market, the bank is more optimistic about the offshore market due to the strengthening of the RMB and the partial easing of tariff tensions. Industries heavily impacted by macro deflation (such as consumer goods, materials, real estate, energy, etc.) have a larger share in the A-share market. Furthermore, considering the strong momentum of southbound capital and the active dual listing IPO activities of A-share companies in Hong Kong, Morgan Stanley expects the Hong Kong market to receive stronger liquidity support.

In terms of industry preferences, Morgan Stanley recommends a balanced strategy, holding high-quality large internet and technology leading companies while reducing exposure to energy and real estate. The bank also retains some exposure to high-dividend stocks to reduce volatility. Key trading strategies for the second half of 2025: 1) Compared to A shares, it is recommended to increase holdings in Hong Kong stocks/ADRs; 2) Focus list of Chinese stocks, Hong Kong stocks, and A-share thematic lists; 3) Selectively hold leading Chinese artificial intelligence/technology companies