Morgan Stanley and Goldman Sachs join the bullish camp. Can A-shares rise by 6% - 18%? | Zhike

Author | Ding Mao

Editor | Zheng Huaizhou

Last week, driven by the optimistic expectations for AI and the positive financial report data of Internet companies, Chinese assets continued to rebound. Within the week, all major broad-based indexes rose across the board. Specifically, MSCI China increased by 3.85%; the Hang Seng Index rose by 3.79%, and the Hang Seng TECH Index rose by 6.03%; in the A-share market, the technology growth direction represented by the STAR50 led the gains. The Shanghai Composite Index rose by 0.97% within the week, the Shenzhen Component Index rose by 2.25%, the ChiNext Index rose by 2.99%, the CSI 300 rose by 1%, and the STAR50 Index rose by 7.07%.

In terms of industry sectors, among the 31 first-level industries in Shenwan, 16 saw an increase. Among them, the communication, mechanical equipment, and electronics sectors had the largest gains; the agriculture, forestry, animal husbandry and fishery, basic chemical, and steel sectors performed poorly. In terms of theme concepts, the Yushu Robot, Humanoid Robot, and Reducer concepts performed the best. In the Hong Kong stock market, 7 out of 12 industry sectors rose, with the information technology, healthcare, and telecommunications sectors leading the gains; the raw materials, energy, and real estate construction sectors performed poorly.

In terms of market sentiment, the market volume this week returned to two trillion yuan, with active trading; at the same time, the financing balance continued to rise. Under the catalysis of themes such as DeepSeek and humanoid robots, the A-share market sentiment was active, and the risk appetite of funds was boosted.

Dense Positive Catalysts, Technology Themes Lead the Rise

From an event perspective, there were relatively dense positive catalysts this week. On Monday (February 17), a symposium for private enterprises was held in Beijing. Participants included Zeng Yuqun, Chairman of CATL, Jack Ma, the founder of Alibaba, Leng Youbin, Chairman of Feihe Dairy, Nan Cunhui, Chairman of Chint Group, Wang Xingxing, the founder of Yushu Technology, Liu Yonghao, Chairman of New Hope, Ren Zhengfei, the founder of Huawei, Wang Chuanfu, Chairman of BYD, Yu Renrong, Chairman of Will Semiconductor, Lei Jun, Chairman of Xiaomi, Qi Xiangdong, Chairman of Qi An Xin, and Ma Huateng, Chairman of Tencent. This released a positive signal to promote the healthy development of the private economy.

Then on Tuesday (February 18), Pan Gongsheng, the governor of the central bank, stated that the Chinese government will implement a more proactive fiscal policy and a moderately loose monetary policy, strengthening the countercyclical adjustment of macroeconomic policies, once again reassuring the market.

In the second half of the week, the financial reports of domestic technology leaders such as Baidu and Alibaba were released one after another. The overall performance of AI-related businesses was outstanding. In particular, Alibaba's confirmation of large-scale capital expenditures in the future further strengthened the market's optimistic attitude towards the domestic AI cycle, promoting the AI market to further expand to infrastructure links such as computing power and cloud service providers.

Overall, benefiting from the boost of the symposium for entrepreneurs and the accelerated growth of AI performance of leading technology companies such as Alibaba, the AI investment mainline in the A-share market continued to expand this week. From the earlier catalysis of DeepSeek and the commercial application of AI such as robots, it has further expanded to infrastructure links such as computing power and cloud service providers. Market confidence has continued to strengthen, related investment opportunities have been continuously explored, and the profit-making effect of technology stocks has significantly improved.

Looking forward to the future, considering the dense event catalysts of domestic AI, it not only provides a long-term growth impetus for related sectors but also forms a positive benefit for the short-term market sentiment, resulting in the continuous exploration of opportunities in related fields. At the same time, considering that the Two Sessions are approaching and the technology industry policy may further accelerate, it will undoubtedly continue to benefit the technology growth direction with an industrial trend. In the short term, under the resonance of positive market policy signals, the recovery of investor sentiment, and the successive realization of the fundamentals of the AI industry, it still provides support for the subsequent market rally.

But at the same time, it should also be noted that since DeepSeek ignited the development of AI in China in mid-January, in less than two months, the average increase of AI-related sectors such as DeepSeek, Yushu Robot, Computing Power Leasing, Cloud Computing, and Humanoid Robot has been nearly 50%, and the increase in some theme directions has exceeded 70%. There may be a risk of overheating in transactions in the short term. Considering that next week will enter the closing market of February, there is certain pressure on the capital side at the end of the month. Therefore, it is necessary to pay attention to the risk of intensified individual stock fluctuations caused by the tightening of market liquidity.

Foreign Giants Continuously Turning Bullish, Triggering a Reassessment Wave of Chinese Assets

Since the emergence of DeepSeek in January 2025, foreign institutions have begun to re-examine the investment value of Chinese assets. After the Spring Festival, several foreign institutions began to adjust their ratings on Chinese assets. First, on February 5, Deutsche Bank stated loudly that it expected the discount on Chinese stock assets to disappear. Subsequently, Bank of America, UBS, and JPMorgan Chase also joined the bullish camp. And the two bullish reports on Chinese assets published by Morgan Stanley and Goldman Sachs last week have triggered widespread discussions in the market.

So, from the perspective of the views of the two top foreign investment banks, Goldman Sachs and Morgan Stanley, what is the core reason why foreign investors are currently optimistic about Chinese assets? And what enlightenment will this bring to investors?

On February 17, Goldman Sachs released the report "AI Reshaping the Landscape", stating that it raised the target points of the MSCI China/CSI 300 Index to 85 points/4700 points, indicating a potential upside of 16%/19% in the next 12 months. The main reasons for this adjustment are based on three factors:
First, in the next ten years, the wide popularity of AI is expected to boost the overall earnings of Chinese stocks by 2.5% per year. Specifically, artificial intelligence can increase the earnings of Chinese enterprises through three main channels - productivity growth, cost savings, and new revenue-generating opportunities. Among them, if Chinese enterprises can adopt artificial intelligence to improve productivity, it will drive the annual earnings growth of MSCI China by 1.1% in the next 10 years; the cost savings brought by AI will drive the annual growth of MSCI China by 1.8% in the next 10 years; and the new revenue opportunities will increase the earnings of Chinese enterprises by about 1% per year in the next 10 years.

Second, the improved growth prospects and the potential boost in confidence are expected to increase the fair value of Chinese stocks by 15%-20%. This is mainly manifested in the following aspects: (1) According to overseas experience, due to the 2.5% annual profit growth, the ROE of Chinese enterprises will permanently increase by 0.3%, corresponding to a 13% revaluation of the stock market; (2) The convergence of earnings per share growth and ROE of US and Chinese technology stocks to the midpoint of their respective ranges may reduce the valuation discount (P/B) from the current 75% to 47%, bringing potential valuation gains of 56%/16% to the valuation of Chinese technology and benchmark indexes; (3) Apart from the fundamentals, technological breakthroughs will still support the confidence of the private sector and enhance the market's investment preference for the technology field.

Third, AI may bring more than 200 billion US dollars of capital inflow into the Chinese stock market.

Based on the above optimistic expectations, in terms of specific investment strategies, Goldman Sachs believes that the Hang Seng TECH Index and the CSI 1000 Index, which have the highest proportion of technology/AI-related stocks, should be actively concerned. And in terms of themes, due to the slowdown of the AI capital expenditure cycle, but the acceleration of the creation and monetization of application scenarios, data and cloud as well as software and applications are more favored.

Following Goldman Sachs, on February 19, another top foreign investment bank, Morgan Stanley, also released two heavyweight research reports, "China is Emerging from the Fog" and "Upgrading MSCI China Rating, Downgrading Indonesia Rating", and overnight upgraded the MSCI China Index rating from "underweight" to "neutral", and adjusted the target prices of the Hang Seng Index/MSCI China to 24000 points/77 points, while maintaining the target price of the CSI 300 at 4200 points.

In this report, Morgan Stanley believes that Chinese assets are undergoing a structural transformation, and the ROE and valuation system are entering a sustainable improvement stage. Therefore, the rating has been upgraded from "underweight" to "neutral". And this upgrade is mainly based on three factors:

First, DeepSeek prompts a global reassessment of China's international position in the technological revolution, and global investors are re-evaluating China's "Innovation 2.0" process. Morgan Stanley believes that the emergence of DeepSeek and others indicates that even in the face of restrictions on high-computing chips, China has the ability to narrow the gap. And with its huge engineer dividend, data resources, mature social network and e-commerce ecosystem, as well as government support, it should receive a corresponding valuation.

Second, the improvement of the domestic and foreign political environment. Domestically, a series of recent policies have shown a positive signal for the country to promote the healthy development of the private economy; internationally, first, the Russia-Ukraine situation has eased, and second, there are some positive changes in the attitude of the US tariff and non-tariff policies.

Third, the technology sector leads the improvement of corporate profitability. Morgan Stanley believes that the ROE of MSCI China has bottomed out in 2023, and as long as deflation does not worsen in the future, it can still be continuously improved driven by the profitability of the technology sector. This mainly depends on the continuous measures taken by Chinese enterprises in cost control, stock buybacks, and dividend increases in the past period.

In terms of specific investment strategies, Morgan Stanley believes that considering factors such as the expected slowdown of Sino-US conflicts, the reduction of RMB depreciation pressure, the better industry structure of the offshore market (with a higher proportion of the Internet and a relatively lower proportion of consumption and real estate) and the liquidity competition pressure faced by the A-share market due to the bond bull market, it is expected that the short-term performance of the offshore market will be better than that of the A-share market.

However, in the medium and long term, it is expected that A-shares will catch up and eventually achieve the same performance within the year. The main reasons are: (1) The proportion of foreign holdings has reached a new low since 2019; (2) The A-H share premium has continued to decline, enhancing the relative attractiveness of A-shares; (3) The proportion of the information technology sector in A-shares is higher, and there are more choices of technology stocks in the future.

In terms of industry allocation, Morgan Stanley suggests overweighting industries with high shareholder returns such as technology/internet, banking, and telecommunications, and underweighting cyclical industries that are greatly affected by deflation.

*Disclaimer: 

The content of this article only represents the author's views. 

The market is risky, and investment requires caution. Under no circumstances does the information in this article or the opinions expressed constitute investment advice for anyone. Before making an investment decision, if necessary, investors must consult a professional and make a cautious decision. We do not intend to provide underwriting services or any services that require a specific qualification or license for trading parties.