Morgan Stanley issued a report stating that the A-share investment sentiment indicator improved after the Lunar New Year, as trading volume rebounded and expectations for the Two Sessions increased. However, offshore Chinese stocks continue to face challenges due to concerns over the disruptive impact of artificial intelligence and competitive pressures. Key areas to watch in the future include the enhancement of AI capabilities by large platform companies, improvement in profitability, and stabilization in external markets.

Despite the improvement in A-share sentiment, offshore Chinese equities came under pressure this week, particularly the Hang Seng Tech Index. Morgan Stanley attributes this primarily to the higher weighting of service-related industries in the Hang Seng Index, which are significantly affected by global narratives around AI disruption. Additionally, intensified price competition among e-commerce platforms has weighed on the earnings recovery prospects of large platform companies. Recent developments in e-commerce and AI technologies have also prompted investors to reduce exposure to direct competitors in broader internet and software sectors.

Morgan Stanley maintains a positive outlook on Hong Kong and A-shares in the medium term but notes that short-term pressure on Hong Kong stocks may persist unless three developments occur: 1) breakthroughs by major internet companies such as $TENCENT (00700.HK)$ 、 $BABA-W (09988.HK)$ in large language models (LLMs), restoring investor confidence in their AI capabilities; 2) a more positive earnings season in March, such as more aggressive capital expenditure plans following the resumption of H200 chip purchases or the reinstatement of share buybacks; and 3) greater stability in the U.S. equity market.

Regarding the improvement in A-share investor sentiment, Morgan Stanley attributes it to post-Spring Festival position rebalancing needs, a pause in large-scale sell-offs by ‘national team’ entities, and optimism surrounding the Two Sessions, especially regarding policies in technology innovation, anti-internal competition, and boosting domestic consumption. Meanwhile, mixed signals are emerging from domestic macroeconomic data. Overall Lunar New Year spending improved due to the extended holiday period, but expenditures remained cautious.

Morgan Stanley further noted that Lunar New Year consumption improved year-on-year, as this year’s holiday was one day longer than last year’s. The total number of travelers increased by 19% year-on-year, although per capita spending declined slightly by 0.2%. Average daily traveler numbers grew by 5.7%, while average daily per capita spending dropped by 11.3%, reflecting continued budget-conscious behavior. Looking ahead to the Two Sessions, Morgan Stanley’s China economics team expects a national GDP growth target of around 5% for this year. Although some provinces have lowered their targets, this move aims to build confidence in the first year of the 15th Five-Year Plan.

However, Morgan Stanley stated that maintaining relatively high growth targets does not necessarily imply stronger stimulus measures, as fiscal policy is expected to remain broadly unchanged from 2025, with a budget deficit rate of 4% and an expanded deficit rate of 11.6%. The policy mix will likely continue to prioritize the supply side, focusing on technology and infrastructure development, while measures targeting consumption and real estate will serve more as safeguards rather than aggressive stimulus tools. Market expectations suggest that the full text of the 15th Five-Year Plan will center on technology, and the introduction of specific targets for ‘consumption as a percentage of GDP’ or a significant increase in social welfare spending would be viewed as unexpected positive developments.

Editor/KOKO