The call sets a clear valuation marker: offshore Chinese shares near eight times forward earnings would be historically cheap territory, and that could become a reference point for bottom-fishing. Until then, Hong Kong-listed Chinese stocks look more exposed than mainland shares, which Morgan Stanley sees as cushioned by government support. The link to the global AI sell-off means Chinese equities are trading partly as a proxy for global risk appetite. Further weakness in US tech could spill over even without fresh domestic news. Any sign of policy support or clarity on the trust tax issue would be the obvious upside risk to the bearish view.

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Morgan Stanley thinks China’s stock slide has another leg to go before valuations hit their historical floor, though it still sees Beijing’s support making mainland shares the safer place to wait.

Summary:

  • Morgan Stanley says offshore Chinese shares could fall a further 10%-15% to around eight times 12-month forward earnings, their historical valuation and historical bottom
  • Mainland-listed shares could see a similar de-rating to around 10 to 11 times forward earnings
  • Drivers cited include selling fears linked to a trust tax, pressure on e-commerce, a weakening economy and elevated global volatility
  • The bank says the past two weeks have worsened negative momentum
  • China’s onshore equities are already in a bear market, and the global retreat in AI stocks has added pressure
  • Morgan Stanley still prefers mainland shares, citing government support and greater exposure to AI and innovation companies

Morgan Stanley has warned that Chinese stocks may have further to fall, with offshore shares potentially dropping another 10% to 15% before reaching what the bank sees as a valuation floor, according to a Bloomberg report.

The bank’s strategists said offshore Chinese equities, the shares of Chinese companies listed outside the mainland, chiefly in Hong Kong, could de-rate to around eight times 12-month forward earnings. That level matches their historical valuation and marks the historical bottom for the market. Mainland-listed shares could see a similar de-rating to around 10 to 11 times forward earnings. Forward earnings multiples measure how much investors pay for each unit of expected profit over the next year, so a lower multiple reflects weaker confidence rather than a change in earnings alone.

According to the report, the strategists pointed to a cluster of pressures behind the accelerating correction: concerns about selling linked to a trust tax, strain on e-commerce companies, a weakening domestic economy and heightened volatility in global markets. They added that developments over the past two weeks have made the negative momentum worse.

The backdrop is already difficult. China’s onshore equities are in a bear market, and the global retreat from AI-related stocks has added to the pressure.

Despite the gloomier outlook, Morgan Stanley continues to prefer mainland-listed stocks over their offshore counterparts. The bank cited government support for the onshore market and its greater exposure to companies in AI and innovation-related sectors. That preference suggests the strategists see policy backing as a partial cushion for mainland shares, even as they expect valuations across both markets to compress further.

The call sets out a clear marker for investors. If offshore shares approach eight times forward earnings, Morgan Stanley’s framework would treat that as historically cheap territory. Until then, the combination of selling pressure, weaker growth and fragile global risk appetite argues for caution over trying to call the bottom early.

This article was written by Eamonn Sheridan at investinglive.com.

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