Morgan Stanley is famously bullish on China, so it's worthwhile to note that the bank this morning downgraded China from Overweight to Equal Weight, the first downgrade since November 2008.
Valuation is the concern, wrote strategist Jonathan F Garner and team:
MSCI China has traded up to within 5% of our March 2016 Target Price of 88 while HSCEI is trading within 4% of our Target of 15,000 and Hang Seng within 7% of our 30,000 Target price.
Since the People's Bank of China first lowered its benchmark interest rate last November, the Shanghai Composite Index has risen 70.2%, the Hang Seng China Enterprises Index has gained 34%. The iShares Large Cap ETF ( FXI) rose 24.8%, the iShares MSCI China ETF ( MCHI) gained 23.6%, Deutsche X-Trackers Harvest CSI 300 China A-Shares Fund ( ASHR) jumped 61.8%.
And valuation is becoming detached from economic reality.
Top-down, Morgan Stanley's proprietary macroeconomic indicator is flashing red. "Our economists' proprietary macro-indicator, MS-CHEX now shows negative yoy growth, indicating the worst aggregate economic performance since the fall of 2008... The correlation did not break in the 2008/09 cycle when the market troughed at around the same time as the economy."
Meanwhile, bottom-up, corporate earnings are not keeping pace with stock price appreciation:
The earnings revisions score for China in our quant model has fallen this month from #6 to #9. The combined CY1 and CY2 earnings revision breadth of the MSCI China index has declined as well. April's number came at -6.5%, which is its worst level since March 2014 and the first time below MSCI EM since July 2014.
Downward EPS revisions for H-shares and MSCI China for both 2015 and 2016 are ongoing with no sign of an inflexion point yet
On the technical front, Chinese equities are over bought:
we have developed a combination of three indicators for a market sell-off warning signal framework. If more than 2 of the 3 boxes are ticked, HSCEI (or MSCI China which is highly correlated) would likely peak.
Currently, we see 1 of the 3 indicators as flashing an amber signal, i.e. 30-day average daily turnover / market cap. However, the other two indicators are very close to passing the threshold and signaling a correction warning.
Historically, our market sell-off warning signal framework has managed to predict both major HSCEI sell-offs in August 1997 and Oct 2007, and three major market corrections in Jan 2004, Nov 2006, and Oct 2010.
Access Investor Kit for Morgan Stanley
Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US6174464486
(END) Dow Jones Newswires
May 06, 2015 20:32 ET (00:32 GMT)
#FX
#Forex
#SaleForex
#PerpetualBull
#MorganStanley
#StockMarket
#BarronsBlog
0 Response to "Perpetual Bull Morgan Stanley Downgrades China's Stock Market -- Barron's Blog"
Thanks for give comment.