Morgan Stanley: Chinese offshore stocks could slide 10%-15% before bottoming

The guidance gives investors a concrete valuation benchmark: if offshore Chinese names trade near eight times forward earnings, they would be in historically inexpensive territory, a level that could serve as a cue for bargain hunters. Between now and then, Chinese stocks listed in Hong Kong seem more vulnerable than their mainland counterparts, which Morgan Stanley believes are shielded by official support. With their link to the global AI sell-off, Chinese equities are partly serving as a proxy for global risk appetite. Further weakness in US technology could spill into Chinese shares even without fresh domestic news. The clearest upside risk to the bearish stance would be any hint of policy action or progress on the trust tax question.

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Yesterday:

• Goldman Sachs trimmed its Kospi target to 9,000, a 25% cut, while keeping a view of over 60% upside

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Morgan Stanley believes China’s equity downturn has further to run before valuations reach their historic low point, even as it views Beijing’s backing as making onshore stocks the less risky choice in the meantime.

Summary:

• Offshore Chinese shares may drop another 10% to 15%, to roughly eight times 12-month forward earnings, according to Morgan Stanley — a level that equates to their historical valuation and historic floor.
• A comparable de-rating could push onshore-listed stocks to about 10-11 times forward earnings.
• Worries about trust-tax-related selling, strain on e-commerce, a softening economy and high global volatility were among the cited drivers.
• The bank added that negative momentum has worsened over the past two weeks.
• Mainland stocks are already in a bear market, while the worldwide pullback in AI shares has compounded the strain.
• Morgan Stanley continues to favour onshore equities, pointing to state backing and a heavier weighting in AI and innovation names.

According to a Bloomberg report, Morgan Stanley has cautioned that the slide in Chinese stocks may not be over, with offshore names potentially losing another 10% to 15% before hitting a level the bank views as a valuation bottom.

The bank's strategists said offshore Chinese equities — shares of Chinese companies listed away from the mainland, mainly in Hong Kong — could be priced down to around eight times 12-month forward earnings. That would align with their historical valuation and represent the market's historic floor. Onshore-listed stocks might undergo a similar repricing to about 10 or 11 times forward earnings. A forward earnings multiple shows how much investors pay for each unit of expected profit over the coming year; a falling multiple therefore signals weaker confidence, not just altered earnings.

The report said the strategists attributed the accelerating decline to several forces: anxiety over trust-tax-related sales, stress among e-commerce firms, a softening domestic economy and higher volatility worldwide. They also said developments over the past two weeks have intensified the negative momentum.

The setting is already tough. Mainland shares are in a bear market, and the wider sell-off in AI-linked stocks has deepened the pressure.

Morgan Stanley still likes mainland-listed equities more than their offshore peers despite the darker forecast. The bank's reasoning points to official support for the onshore market and a larger footprint in AI and innovation-focused businesses. That stance implies the strategists regard state backing as a partial buffer for onshore stocks, even though they anticipate further multiple compression on both sides.

This call gives investors a clear benchmark. Should offshore shares get close to eight times forward earnings, Morgan Stanley's model would regard them as historically inexpensive. Until that point, selling pressure, softer growth and shaky global risk sentiment argue for restraint rather than trying to call the bottom too soon.