Why Morgan Stanley cut its forecast for China’s first quarter GDP in 2022

A woman gives her swab and test kit to medical staff before receiving a nucleic acid test for Covid-19 at a private testing site on January 17, 2022 in Beijing, China .

Kevin Frayer | Getty Images News | beautiful pictures

According to US investment bank Morgan Stanley, the economic costs of China’s zero-Covid policy are increasingly expected to outweigh its benefits.

China’s zero tolerance for Covid puts the country at a disadvantage compared to other countries with endemic strategies, Laura Wang, their China equity strategist, told CNBC’s Emily Tan.

In January, the US investment bank cut its forecast for China’s first-quarter GDP – lowering its estimate to 4.5% year-on-year growth, from its previous forecast of 4.5%. ,9%.

“We [started] “This year, the buffer from an increase in exports may not be as high as… last year because of many other countries and markets,” said Wang. [are] reopened. “

“As a result, we are expecting a larger consensus decline in earnings. At this point, we think investors are still being overly optimistic with their expectations for corporate earnings,” she said. speak.

Wang said the bank favors A-shares over MSCI China for 2022. A-shares are yuan shares of companies based in mainland China, traded on exchanges. Chinese stocks in Shanghai and Shenzhen.

The bank expects the CSI 300 index to hit 5,250 by year-end and the MSCI China index to hit 95 in the same period. The CSI 300 is currently trading at around 4,680 after losing about 5% this year. The MSCI China index, which foreign investors often use as a benchmark, is hovering around 82 – 1.3% lower than at the start of the year.

As reported by Morgan Stanley on January 16, “increased uncertainty due to the overland spread of omicrons [and] Default risk in the property market “is some reason to remain cautious for Chinese stocks.

Morgan Stanley maintained its initial forecast for full year 2022 of 5.5% growth for China, but noted that it continues to see downside risks from potential closures because of “Q1 losses. can hardly be compensated.”

The bank does not expect a change in its zero-Covid policy before the second half of 2022.

“The biggest pressure will be on private consumption, as the rise of social distancing and local/regional deadlock may become inevitable. Actual Lunar New Year (LNY) ) is increasingly likely with China’s ‘Covid-zero’, Morgan Stanley analysts said.

Read more about China from CNBC Pro

China report The first omicron Covid in December and continues to see the community spread throughout the cities. Beijing officials are also staying.”Full emergency mode“on the eve of the Winter Olympic Games and the tourist season of the Lunar New Year.

Despite cutting its first-quarter GDP growth forecast, Morgan Stanley noted that “recovery could regain ground amid policy easing.”

Earlier this week, People’s Bank of China cuts reverse repos rate 14 days to 2.25%, down from 2.35%, to “maintain stable liquidity ahead of the Lunar New Year, Reuters reported.

Concerns about ‘policy flaws’

Analysts generally expect the Chinese economy to pick up after the first quarter as stimulus and monetary easing measures are expected.

Catherine Yeung, chief investment officer at Fidelity International, said China is likely to outperform other markets this year.

Contrasting surprises for US inflation and a hawkish Fed policy change could also trigger higher volatility in growth stocks.

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