Morgan Stanley Cautions China: 2025 Markets Set for Volatility from Tariffs and Tensions

China's equity markets are bracing for a volatile 2025, cautions Morgan Stanley, highlighting downward earnings trends, potential 25% U.S. tariffs, and escalating geopolitical tensions. Analysts favor robust A-shares despite the looming headwinds.

China's Equity Markets Face Volatility in 2025

Due to concerns over geopolitical tensions, possible tariffs, and downward profit pressures, analysts at Morgan Stanley predict that China's equities markets will be quite volatile in 2025, Investing.com reports.

"We still expect a more bumpy China equity market in 2025," the bank noted in a letter shared on Friday. Deflationary trends and chronic macroeconomic headwinds are brought to light by them.

Following an 8-point decline to 77% on the Morgan Stanley A-Share Sentiment Index, the bank observed that investor mood in the A-share market has already diminished.

Morgan Stanley reported a 10%-17% decline in daily turnover across major categories from November 21-27. These segments include A-shares and ChiNext.

Earnings Revisions and Tariff Risks Dominate Concerns

Also, they point out that the market's anxiety is being reflected in the acceleration of downward earnings revisions.

Some say that the possibility of a 25% tariff on Chinese imports by the next Trump administration is a major worry for the macroeconomy.

The housing industry displayed contradictory signals, with higher sales but low developer confidence, according to Morgan Stanley. On the one hand, exports are resilient because of competitive pricing. For November, the manufacturing PMI is anticipated to remain unchanged at 50.1, indicating a moderate expansion.

Morgan Stanley's Strategy for A-Shares in 2025

According to Morgan Stanley, China's equity market is expected to face a number of challenges in the coming years. These include ongoing weak earnings until 2025, a weakening of the USDCNY to counteract tariff effects, higher equity risk premiums due to a more aggressive US policy stance, the possibility of heightened tensions between the US and China, and profit-taking after a relatively strong performance so far this year.

Morgan Stanley still favors A-shares over offshore stocks, even though they have their share of problems. In addition to the direct liquidity support from the PBOC's swap and re-lending initiatives, they point out that A-shares are less sensitive to geopolitical and currency swings.

In 2025, the company plans to avoid firms that are vulnerable to tariffs or supply chain issues and instead prioritize A-shares with excellent profitability and return on investment potential for shareholders. For this unpredictable environment, they have highlighted preferred trades on their China/Hong Kong Focus List and A-share Thematic List.