Morgan Stanley sets a basic target of 27,500 points for the Hang Seng Index by the end of the year, with a "bull" scenario target of 34,700 points, urging to increase holdings in high-quality technology leading stocks

Morgan Stanley released its market strategy report for China in 2026, noting that the MSCI China Index and the Hang Seng Index have both risen over 30% year-to-date, making China one of the best-performing markets among major stock markets in 2025, reflecting structural improvements. The bank expects 2026 to be a stable year following the high returns of 2025, estimating moderate upside potential for the indices, accompanied by moderate earnings per share growth, and valuations stabilizing at a higher range, as China re-establishes its footing in the global tech race and trade tensions ease. Fundamental and thematic stock selection remains key, with A-shares expected to perform similarly to offshore markets.

The bank slightly raised its target for the Chinese stock market indices, maintaining a relatively conservative view on earnings growth for 2026 (6%), and believes that a forward price-to-earnings ratio of 12 to 13 times for MSCI China is reasonable. The bank's latest "base" scenario target for the Hang Seng Index by the end of December 2026 is 27,500 points (equivalent to a forecasted price-to-earnings ratio of 11.5 times for December next year). Previously, the bank set a "base" scenario target for the Hang Seng Index at 24,500 points by the end of June next year.

The bank raised its "base" scenario forecast for the State-Owned Enterprises Index from the original 8,900 points to 9,700 points (equivalent to a forecasted price-to-earnings ratio of 9.8 times for December next year), and raised its forecast for the MSCI China Index from 78 points to 90 points (equivalent to a forecasted price-to-earnings ratio of 12.7 times for December next year), as well as the CSI 300 Index forecast from 4,000 points to 4,840 points by the end of December next year (equivalent to a forecasted price-to-earnings ratio of 14.4 times for December next year), with potential increases of 2%, 2%, 3%, and 4% respectively as of November 12, 2025. The bank's new December 2026 index price benchmark scenario target shows moderate increases, aligning with its view that current market momentum will continue rather than break through to significantly new highs.

Morgan Stanley indicated a "bull" scenario target for the Hang Seng Index of 34,700 points by December next year (equivalent to a forecasted price-to-earnings ratio of 13.4 times), which corresponds to an expected 8% change in earnings per share next year, equivalent to a forecasted price-to-earnings ratio of 13.4 times for December next year. The bank set a "bull" scenario target for the State-Owned Enterprises Index at 12,190 points by December next year, and for the MSCI China Index at 114 points by December next year.

Capital flows and liquidity are expected to remain net positive for A-shares and offshore markets in 2026, assuming that policymakers follow a "small steps in the right direction" approach, focusing on consumption stimulus, real estate inventory digestion, and anti-involution. Based on the latest global marketing feedback, the bank sees strong interest from global investors and expects southbound capital flows to continue supporting trading volumes in the Hong Kong market.

Morgan Stanley maintains a "barbell" strategy in its industry preferences: overweighting high-quality internet and tech leaders while underweighting sectors dragged down by macroeconomic factors, such as real estate, consumer staples, and energy The bank also maintains a selective stock picking approach for dividend stocks to obtain stable cash returns. The bank indicated that the key trading ideas for 2026 are: (1) the bank's key A-share and Hong Kong stock list; (2) tactical trading of beneficiaries included in the southbound Stock Connect; and (3) beneficiaries of anti-involution