Morgan Stanley has issued a report on the Chinese market indicating that MSCI China earnings in 4Q24 were in line with expectations for the first time in 3.5 years. While the consumer goods, communication services, and financial sectors performed steadily, the impact of heightened US tariffs on growth and capital expenditure may bring about new uncertainties, especially starting from 2Q.

Morgan Stanley attributed this earnings inflection to the direct result of an aggressive reduction in expectations, proactive corporate self-help effort, and the accelerated investment and adoption of technology/ AI.

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Although the recent US tariff hikes may drag down China's economic growth, the impact on overall stock market earnings should be smaller than on macroeconomic growth, as the revenue exposure of listed Chinese companies to global trade (especially the US market) is much smaller than how much the macroeconomy has to rely on export growth, the broker noted.

Believing that the A-share market will be in a more advantageous position for hedging and diversification, Morgan Stanley recommended that investors should switch to A-share defensive caps, which are expected to benefit directly from stable purchases by the national team (Central Huijin buying) and the lower sensitivity of Chinese investors to external developments.