(Bloomberg) -- Corporate earnings in China may continue to underwhelm as the measures taken by Beijing so far are insufficient to reverse the deflationary trend gripping the economy, according to Morgan Stanley.
“We already had 13 quarters of consecutive earnings miss, and we expect the upcoming fourth quarter results to be another miss,” Laura Wang, chief China equity strategist at the firm, said in an interview on Wednesday. “Without very meaningful policy stimulus, the next two quarters could be earnings miss as well.”
Wall Street brokerages have turned more cautious on Chinese stocks in recent weeks, given growing doubts over the strength of the government’s support and the renewed risk of geopolitical tensions following Donald Trump’s win in the US presidential election. Morgan Stanley last month reduced Chinese equities to a slight underweight within the region, citing stronger headwinds on corporate earnings.
“The reason that we are not seeing a very significant valuation rating upside at this point is because we are not expecting a lot of policy step-up from a fiscal stimulus perspective in the near-term,” Wang said. “What Beijing has done is not enough to reverse the deflation trend, which holds the key to driving valuation up.”
Wang estimates valuations for the MSCI China Index will remain at about 10 times forward earnings at the end of 2025. The bank had flagged overheating risks in China’s stocks in early October when investors rushed in following Beijing’s policy blitz. The gauge has fallen about 17% from an Oct. 7 peak.
Ideally, China would need a policy package of around 10 trillion yuan ($1.4 trillion) over two to three years, targeting consumption and excess inventory in the property market, Wang said. But “we don’t think that’s likely to happen in the very near term.”
“You will be seeing a continuous downward revision of earnings,” Wang said. “It’s likely going to take another two years or even longer to get out of the deflationary spiral without additional policy pivot.”
Even so, investors are pinning their hopes on Beijing to do more. Stocks have advanced this week on speculation that authorities will release further stimulus at the Central Economic Work Conference.
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