According to Morgan Stanley, China looks like a good place to invest again.
The easing of zero-COVID controls that started earlier this month will likely boost earnings, the US bank said, upgrading Chinese stocks to an 'overweight' rating against emerging markets.
A team of strategists led by Laura Wang wrote in a research note that multiple positive developments along with a clear path toward reopening warrants an upgrade and index target increases for China.
Many analysts believe that Beijing is shifting toward ending its "zero-COVID" policies in favor of an economic reopening after cities across China relaxed their Covid-19 testing requirements.
Morgan Stanley predicts that a revival in demand will lead to companies posting stronger earnings and lift the Hong Kong Hang Seng index.
"Our base case is that we are at the beginning of a multi-quarter recovery in earnings revisions and valuations with decent ROE improvement."
According to Morgan Stanley, the impact of the economic reopening won't be felt until the second quarter of next year.
Wang's team said the path would be difficult.
The pressure on earnings should continue through the first quarter of the next fiscal year. There are wide swings in sentiment between over-optimism for a fast reopening and at times rapid disappointment regarding a seemingly slow and zig-zagging move towards a Covid-zero exit.
According to Morgan Stanley, investors should keep an eye on the relationship between Beijing and Washington.
The market's view on Chinese equities is likely to be further lifted by official confirmation of that trip.
US futures are rising and Hong Kong stocks are jumping after China's vaccine move.
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