Morgan Stanley says that Chinese stocks could enjoy a more “sustained rally” in the next phase — beyond a near-term jump — as they ride on the wave of stimulus measures and signals announced last week. “The policy pivot last week … exceeded our expectations, with forceful monetary easing and unprecedented measures aimed at stabilizing and supporting the stock market and halting the property market’s decline,” Morgan Stanley analysts wrote in a Sept. 29 report. They predict at least a 10% rally in the near term , and even more ahead. “In the next phase [we] see potential for a more sustained rally – with valuations reaching levels last seen during the economy’s reopening from November 2022 to March 2023,” it added, provided there’s “further clarity” on earnings improvements amid a broader growth recovery and efforts to stamp out deflation. Against that backdrop, the bank indicated its preference for certain stocks that are set to benefit from easing measures. These include A-share companies with “high excessive” dividend yields and free cash flows relative to the 2.25% relending rate, as well as “discounted” shares listed in both Hong Kong and in the mainland with the latter able to benefit from the easing measures, it said. A-shares are those listed in mainland China. Stock screens Morgan Stanley did a few stock screens to sieve out those set to benefit. Here are two of them. The first showed six stocks – listed in Hong Kong – that turned up, which trade at deep discounts to A-shares, and should benefit from the central bank’s announcements, it said. The second one screened out these stocks which have a current dividend yield below 2.25%, but with free cash flow yield “meaningfully” above 4% — versus the 2.25% borrowing cost. That means these firms will likely be more motivated to increase their dividend payouts, and buy back shares or increase the shareholdings. China’s stimulus measures Chinese stocks have already rallied last week and again on Monday, after China’s central bank announced a slew of measures to shore up economic growth, including cutting the reserve requirement ratio (RRR) of cash that banks hold by 50 basis points. It also announced plans for interest rate cuts. That also followed a high-level meeting where top leaders called for halting the property market decline, and strengthening fiscal and monetary policy. Morgan Stanley says it expected a supplementary budget to be announced in late October, supporting consumption and local government financing. It also sees another 10 to 20 basis point rate cut and a 25 to 50 basis point RRR cut by year-end. – CNBC’s Evelyn Cheng contributed to this report.
