“Multiple positive developments alongside a clear path set toward reopening warrant an upgrade,” strategists including Laura Wang wrote in a note dated Sunday. “We are at the beginning of a multi-quarter recovery in earnings revisions and valuations.”

The brokerage lifted China to overweight from an equal-weight position it had held since January 2021. It raised its end-2023 targets for the MSCI China Index to 70 from 59 and for the Hang Seng Index to 21,200 from 18,200.

The new targets imply more than 10% upside, even after stocks surged in Hong Kong and on the mainland on Monday as authorities accelerated a shift toward reducing pandemic curbs.

A slew of positive developments is helping improve the outlook for Chinese assets, with more market watchers calling for a bottom in the nation’s stocks. The benchmark CSI 300 Index jumped almost 10% in November, its best month since July 2020, as a global rally enhanced the impact of Covid-regulation relaxation and property rescue measures. 

Morgan Stanley suggests further increasing exposure to reopening beneficiaries such as consumer names, and adding allocation to offshore Chinese equities.  It’s now “more confident that a new bull cycle is beginning” for emerging market stocks given higher earnings growth and expansion of multiples.

The upgrade of Chinese equities is in line with the brokerage’s preference of North Asian markets such as South Korea and Taiwan. Still, China’s recovery path “is set to be bumpy as earnings pressure continues into early next year”, the strategists said. BM/DM