Morgan Stanley has reaffirmed its bullish stance on Japanese and Indian stock markets while further lowering its expectations for China, citing a lack of significant growth improvements in Asia’s largest economy.

The firm expressed a preference for Japanese markets over other emerging markets in Asia. Despite slightly reducing its year-end targets for Japanese indices, Morgan Stanley still anticipates a 14% upside from current levels, especially for the TOPIX index. The brokerage expects Japanese inflation to improve and strong earnings growth to persist, driven by enhanced corporate reforms.

Earlier in August, Japanese markets experienced sharp declines as hawkish signals from the Bank of Japan undermined the yen carry trade, sending the Nikkei 225 and TOPIX into a bear market. However, both indices have since recovered much of their losses.

Morgan Stanley also predicts a broader improvement in risk appetite driven by anticipated global interest rate cuts and expects most developed economies to achieve a soft landing. The firm advises reducing exposure to Asian semiconductor stocks in favor of domestic and defensive sectors.

In India, Morgan Stanley sees a “compelling structural opportunity,” pointing to robust GDP growth, relative stability in the rupee, and the positive impact of GDP growth on corporate profits. The brokerage also highlighted “secular growth” in the Indian economy and increased domestic retail spending as key factors driving Indian stocks. India’s Nifty 50 and BSE Sensex 30 indices are near record highs, largely avoiding the recent downturn in global stock markets.

Morgan Stanley Lowers China Targets Amid Macro Concerns and Weaker Fund Flows

Conversely, Morgan Stanley has downgraded its 2024 targets for Chinese indices, including the MSCI China, Hang Seng, and Shanghai Shenzhen CSI 300. The firm anticipates lower earnings growth and valuations for Chinese stocks in 2024 and 2025, especially as China’s GDP growth fell below the government’s 5% annual target in the second quarter.

“Even with some additional policy easing, which could lead to a modest growth uptick in Q4, our economics team still believes full-year growth may fall short of the 5% target,” Morgan Stanley analysts noted. The brokerage also highlighted persistent local deflation and a continuing slowdown in the housing market as ongoing challenges weighing on demand.

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