Morgan Stanley slashes target on Shanghai Composite by nearly 19%, lists four reasons

NEW DELHI: Brokerage firm Morgan Stanley in a report on Thursday affirmed their cautious stance on Chinese markets. They have slashed their target for Shanghai Composite by nearly 19 per cent to 3250 for mid-2016 from 4000 levels earlier.

"We set a new mid-2016 Shanghai Composite Target Price range of 3,250-4,600 (-30% to -2% from the June 24 close), down from our prior end-2015 target range of 4,000-4,800.

The brokerage firm further added that the stance on China A shares is that it is probably not a dip to buy kind of market. "In fact, we think the balance of probabilities is that the top for the cycle on Shanghai, Shenzhen and Chinext has now taken place," added the report.

Shanghai Composite index extended losses, down 7.4 per cent on Friday. The index posted its worst losses in seven years. The key CSI300 index fell 7.9 percent, to 4,336.19.

For the SSEC, it was the worst one-day loss since Jan 19. For the CSI300, the drop was the biggest since June 2008, Reuters reported.

Morgan Stanley says that they remain concerned over four factors: a) increased equity supply, b) continued weak earnings growth in the context of economic deceleration, c) high valuations, and d) very high margin debt to free float market capitalization.

Their Shanghai Composite Index EPS forecasts for 2015 and 2016 are significantly lower than consensus (5% vs. 9% for 2015, and 8% vs. 16% for 2016).

Morgan Stanley's study of 34 prior major EM equity market bull runs also showed that strong equity market performance tends not to be associated with subsequent GDP growth improvement (observed in only seven cases), counter to the argument often made that the market is likely to lead a strong economic recovery.