(Yicai Global) Dec. 6 -- Morgan Stanley, Goldman Sachs and other international investment giants are increasing their holdings of Chinese equities as the country relaxes its epidemic prevention policies, more real estate support measures are rolled out and the US dollar shows signs of weakening.

Morgan Stanley raised its weighting in the mainland bourses to ‘Overweight’ from ‘Equal-weight’ on Dec. 4, Yicai Global has learned. Goldman Sachs and JPMorgan Chase are also advising investors to do the same.

Morgan Stanley believes that this is the beginning of a period of earnings recovery and valuation repair for listed Chinese companies that will last for many quarters, said Wang Ying, chief equity economist at the Chinese arm of the New York-company firm. The return on equity will improve, she added.

“With optimized epidemic prevention measures, the resulting economic recovery and improvement in corporate profit margins should drive up the earning growth rate of those in the CSI 300 Index, which is a ranking of the top 300 firms on the Shanghai and Shenzhen bourses, to 15 percent next year, from 4 percent this year, said Meng Lei, China equity strategist at Swiss banker UBS’ securities unit in China, UBS Securities.

“China is shifting to a more dynamic and flexible Covid-19 prevention strategy, and we can see signs of a shift from ‘containing the epidemic’ to ‘flattening the curve,’” said Zhang Meng, macro and foreign exchange strategist at UK lender Barclays. “This reduces the risk of weaker economic growth and should support risk assets.”

Both the MSCI China Index, compiled by global index providers MSCI, and the CSI 300 Index are likely to jump 16 percent by the end of the year from their current level to 70 points and 4,500 points respectively, Goldman Sachs said.

The MSCI China Index has an upside potential of 10 percent from now to the end of next year, returning to August 2022 levels, said Liu Mingdi, chief Asia and China equity strategist at JPMorgan.

The way China handles the pandemic will keep changing, and more focus will be put on communication, vaccination and hospitalization, Wang said. As the economy rebounds, consumption is expected to benefit. It is therefore recommended to increase exposure in this sector and hike Chinese equities in the offshore market.

Investor positioning on the Chinese stock market is quite low already, and there is not much room to reduce it further, said Liu Jinjin, chief China equity strategist at New York-based Goldman Sachs. After a long period in the doldrums, many firms announced share buyback plans as they believe the market valuation of their own stock is quite low.

“Now that the US midterm elections are over, the geopolitical tension will stay relatively calm, and both equity costs and risk premiums will gradually decline,” Wang said. “This should encourage investors to reinvest in the Chinese stock market.”

The Central Economic Work Conference, which sets the national agenda for the economy and will be held later this month, will lay out the macroeconomic growth targets for 2023 and more clearly define the path to containing the pandemic, she added.

Editors: Tang Shihua, Kim Taylor