Morgan Stanley-China Equity Strategy Thoughts on the Recent Rally-此為英文文檔

MorganstanleyRESEARCH

May7,202409:00PMGMT

ChinaEquityStrategy|AsiaPacific

ThoughtsontheRecentRally

Weexpecttherallymomentumtoabate–don'tchaseattheindexlevel.GlobalgeopoliticalconcernsandrisingUSand

Japanesemarketvolatilityhaveeased;near-termoverboughttechnicalsignalshaveappeared.Werecommendsingle-stockandthematicopportunitiesgivenimprovedinvestorsentiment.

China'sequitymarkethasbeenthebestperformergloballyonaone-weekandone-monthbasis;ithasbeenoutperformingglobalandemergingmarketsYTD.

Keydriversoftherecentrallyrangefromdomesticandglobalfactorsto

positioningandfundflows,aswellasthelatestpricetechnicals:1)Domestically,weseesomeearlysignsofmacrostabilization,especiallyinexportsand

manufacturing,togetherwithstepped-upeffortsbypolicymakerstostabilizethe

stockmarket(withafocusonA-shares).2)Globally,thecontextbehindthisrally

includesdiversificationawayfromgeopoliticaluncertaintyandrisingvolatilityintheUSandJapanesemarkets.InvestorstookprofitsonkeyUSTech/SemioutperformersandadjustedportfoliosastheVIXspikedonFriday,19April,aheadofanticipated

militaryconflictbetweenIranandIsrael.Theexpectationofhigheryieldforlongerandyenweaknessalsoexacerbatedsuchactions.3)Positioning:globallong-onlyinvestorshittheirlowestunderweightpositionsaroundtheendofJanuary.

ContinuousoutflowsfromChina/HKfinallytookabreak.4)Fromatechnical

perspective,Chineseequities'realizedvolatilitypeakedinlateJanuary,forcingfundmanagerstoreducetheiractiveriskbytrimmingunderweightsandcoveringshorts.

Weexpectthecurrentrallymomentumtoabate;don'tchasefurtherattheindexlevel:Globalinvestors'fundpositionshavealreadyimproved;meanwhile,thereis

lessurgencytodiversifyawayfromtheUSandJapanesemarkets,giventhatthegeopolitical,yield,andFXfactorsareabatingorreversing.Wealsoseenear-termtechnicaloverboughtsignals,whichcoulddeterfurtherbuyingbyglobalquant

funds.Last,consumptionandthehousingmarketlikelyneedmoretimetopickup,implyingongoingpressureondeflationandcorporateearnings.

Valuation–MSCIChina's12-monthforwardP/Eisnow9.9x,a20%discountvs.MSCIEM:Valuationinbothabsoluteandrelativetermsvs.EMhasrecoveredto

aroundthelowerboundoftherangesince2017.Itwillbecriticaltoseewhether

China'svaluationandtheequityriskpremiumassociatedwithinvestinginChinacanstayabove~10x12-mnthforwardP/E,alongwitha<20%discountvs.MSCIEM,orifChinaretreatstotradeinapersistentlylowervaluationregime.

Wecontinuetobelievethemarketsetupforfundamentalandthematicinvestinghasimprovedsignificantlyvs.lastyear:WerecommendthemessuchasSOE

reformandChinaGoingGlobal.Signpostsforasustainedbetarally:1)1Q24

earnings;2)privateconsumptionmomentum;3)governmentpolicy/meaningfulhousingstimulus;4)reflationandthesupply-centricgrowthframework;5)

geopoliticaldevelopment–USelectionsandChina'smultilateralrelationships.

Update

MorganStanleyAsiaLimited+

LauraWang

EquityStrategist

+8522848-6853

Laura.Wang@

MorganStanleyAsia(Singapore)Pte.+

JonathanFGarner

EquityStrategist

+656834-8172

Jonathan.Garner@

MorganStanleyAsiaLimited+

GilbertWong,CFA

QuantitativeStrategist

+8522848-7102

Gilbert.Wong@

JasonNg,CFA

QuantitativeStrategist

+8522848-8845

Jason.Dl.Ng@

CatherineChen

EquityStrategist

+8523963-4186

Catherine.Chen@

RaymondKLiu

EquityStrategist

+8522848-7293

Raymond.K.Liu@

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Foranalystcertificationandotherimportantdisclosures,refertotheDisclosureSection,locatedattheendofthisreport.

+=Analystsemployedbynon-U.S.affiliatesarenotregisteredwithFINRA,maynotbeassociatedpersonsofthememberandmaynotbesubjecttoFINRArestrictionson

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Morganstanley

RESEARCH

Update

Giventhestrongerrealgrowthmomentumin1Q,MorganStanley'seconomicsteamfor

ChinaexpectsnominalGDPgrowthtomaintainastablepaceof~4.5%in2Q-4Q,upfromthetwo-yearCAGRof3.3%in4Q23,drivenbyexportsandmodeststimulus.Theteamhasalsoraiseditsfull-year2024realGDPgrowthforecastfrom4.2%to4.8%,andnominal

growthforecastfrom4.3%to4.7%(reflectingadipinGDPdeflatorfrom0.1%to-0.1%).

Exhibit2:China'srealGDPgrowth–realGDPgrowth

trajectoryholdinguprelativelywellthankstoexportstrength

9%

8%

7%

6%

5%

4%

3%

2%

1%

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024E

2025E

4.8%

2025E:

______NewForecastOldForecast

2024E:

4.5%

4.2%

4.0%

Source:CEIC,MorganStanleyResearch(E)estimates

Exhibit3:China'sGDPdeflator–deflationarypressurepersists

5%

4%

3%

2%

1%

0%

-1%

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024E

2025E

0.1%

2025E:

0.4%

______NewForecastOldForecast

1.1%

2024E:

-0.1%

Source:CEIC,MorganStanleyResearch(E)estimates

MorganStanleyResearch

FirmerstancebypolicymakerstostabilizethestockmarketwithafocusonA-shares:

SucheffortsbyChinesepolicymakerscoulddatebacktolateAugust2023,whenaseriesofmeasureswasannounced,includinghalvingstampdutyandrestrictingsharedisposalsbycontrollingshareholders.OnOctober12,2023,theChinesegovernmentannounceddirectbuyingofstocksintheA-sharemarketthroughCentralHuijin.

However,sincelateJanuary2024therehasbeenamajorstep-upintheefforts.A

dedicatedmarketstabilizationpackagewasreportedandnewleadershipfortheCSRCwasannounced.Therehasbeenastrongerpushforshareholderreturnenhancement(includingdividendpaymentandsharebuybacks)andcorporategovernancereforms,aswellastighterregulatorymeasuresagainstmarketmanipulative,non-compliantand/orillegalactivities.ThelatestnewNineArticlesforthecapitalmarketshavealsoputaninstitutionalizedfocusontheseinitiatives.

Theseeffortscombinedhaveeffectivelyhelpedsetafloor,particularlyfortheonshoreA-sharemarket.

What'snext–deflationarypressurepersists,whilethetimingandscaleofpolicy

stimulusremaininquestion:Despitetherecentstabilizationofmacroconditions,oureconomicsteamforChinacontinuestobelievethatthedeflationarypressureisnotyetabating(seetheirlatestlowerGDPdeflatorforecastfor2024and2025).

ThelatestPolitburomeeting(end-April)hasbeeninterpretedbythemarkettohavesentamoredovishsignalonhousing,butthepaceofpolicychangeislikelytoremainrathermodest.Thereforewebelievethefundamentalsofcorporateearningswillneedtoshowmorepositivesignstohelpkeepupinvestorsentimentfromhereon.

PleaseseeWhereEarningsandValuationStandforourthoughtsonhowcorporate

earningsandvaluationfortheChinesemarkethavetrended,alongwiththeimplicationsforinvestordecisions.

3

4

TheGlobalContext

JonathanGarner

DiversificationawayfromgeopoliticaluncertaintyandrisingvolatilityintheUSandJapanesemarkets

TheglobalcontextfortherecentrallyinChineseequitiesisintriguing.Intheoffshore

HongKongmarket,itcanbedatedquitepreciselytoeventsonFriday,19April–the

followingMondaytheHongKongmarketgappedhigherattheopeningandhasralliedpersistentlysincethen.ThatFriday,theVIXspikedtothehighestleveloftheyear(closeto20)asinvestorsadjustedportfoliosaheadofanticipateddirectmilitaryconflict

betweenIranandIsrael.Inparticular,investorstookprofitsonkeyoutperformersinthe

USTechnology/SemiconductorandInternetsectorswithspillovertomega-capex-Chinatechnologystocks.Forexampleoverthethreedaysfrom17to19April,Taiwan

SemiconductorADRs(TSM)fell12%.

Particularlyforinvestorswithshorttimehorizons,includinglong/shortequityhedgefundsandtrend-followinginvestors,thesedeclinesintheperformanceofpreviouslyproductivelongpositionshadtheimpactofrequiringthemtoreducepreviously

productiveshortpositionsinHK/China.

Ifthiswasthegenesisoftherally,italsocoincidedwithotherpressurepointsonhigher-

valuedmarketsandsectors.Mostnotably,nominalandrealUSyieldsbackedup

considerably,withtheUS10-yearyieldpeakingat4.7%on25April.Likewise,USdollar

strengthandyenweaknessreachedacrescendo,withUSDJPYreaching160on26April,promptingofficialinterventiontosupporttheyenbytheJapaneseauthoritiesforthefirsttimesince3Q2022.

VIXIndex

USGG10YRIndex

Exhibit4:VIXvs.US10-yearTreasuryyieldsince2023–theVIXhasfallenbackdownto13.5,whileUSyieldsaredown20basispointsrecently

30

25

20

15

10

____VIX

USGG10YR

5.5

5.0

4.5

4.0

3.5

3.0

Jan-23Apr-23Jul-23Oct-23Jan-24Apr-24

Source:Bloomberg,MorganStanleyResearch.DataasofMay3,2024.

What'snext–USandJapanesemarketvolatilitygraduallyabates:Mostoftheseglobalmacrofactorsarenowabatingorreversing.TheVIXhasfallenbackdownto13.5andUSyieldsaredown20basispoints,fallinglastweekaftertheFederalReservereducedits

monthlyQTprogrammebymorethanhalf,fromUS$60bnpermonthtoUS$25bnper

month.Theyenhasstrengthenedto153.Andwiththeglobalmacrocontextnormalising,mega-capnon-Chinatech,includingkeystocksinAsia,ismakingprogressagain.Again,forexample,TSMisnowtradingaboveits17Aprillevel.

WhatthisallmeansisthatChina'srallyneedsdomesticfundamentals–inparticular

earnings–toimprovefortherecentrallytobesustained.There-rating–of2forwardP/Epoints,toaround10xcurrently–hasalsonarrowedtherelativevaluationdiscountto

globalpeersinthelastthreeweeksconsiderably:from>30%versusEMto<20%andfromclosetoa50%discountversusJapantocloserto35%.

MorganStanleyResearch5

6

Jan-10

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Morganstanley

RESEARCH

Update

Exhibit5:MSCIChina12-monthforwardP/Evs.MSCIEMandMSCIJapan–MSCIChinaatarelativediscounttoglobalpeers

20.0x

18.0x

16.0x

14.0x

12.0x

10.0x

8.0x

6.0x

MSCIEMFwdP/E—MSCIChinaFwdP/E—MSCIJapanFwdP/E

Source:DataStream,MSCI,MorganStanleyResearch.DataasofMay3,2024.

GeopoliticaluncertaintyforChinaremainsinquestionwithUSelectionsandEUtradecontroversy:Lookingfurtherahead,theUSPresidentialelectioncampaignseasonislikelytokickintofullgearcomeJuly.Wecontinuetoemphasizethatinourmultipolarworld

framework,relationsbetweentheUSandChinaareunlikelytoimprovematerially,

particularlyduringelectionperiods.Recently,therehasbeensomethingofade-escalationofconfrontationsincelastNovember'sSanFranciscosummitmeetingbetweenthetwocountries'Presidents(aftertheballoonincidentthepreviousJanuaryandtheRussian

invasionofUkraineinFebruary2022hadledtoheightenedtensions).Fromamarket

perspective,wethereforetendtothinkthepoliticalcalendarwillbecomeaheadwindforChineseequities.

Meanwhile,PresidentXiisvisitingEuropethisweekandwillbelookingtomitigate

potentialEUtariffsonChineseEVimportsthissummeraswellastheEUCommission'slaunchingofinvestigationsintoChinesesolar,railway,andmedicaldevicesfirms.See

Bloomberg'srecentnewsonEUGoesonChinaTradeOffensiveAfterGetting‘Played’.

Morganstanley

RESEARCH

Update

2.01.00.0-1.0-2.0-3.0-4.0-5.0

TheFundFlowandPositioningContext

Outflowpressureeasedaspositioninghitrecordlowlevel

WehadhighlightedinourChinaPositioningreportofFebruary29thatthemassiveforeignoutflowpressurehadlargelycometoapause.Weexpectedmorefocusonsinglestock

ideasandmanagingbenchmarkdiscrepancyrisk.Indeed,globalmutualfunds'positioninginChineseequitieshititsrecentcycletroughinJanuary(Exhibit6).Eversince,Globalinvestorshavebeengraduallyonthemarginadjustingtheirunderweightpositionsin

China,andselectivelyaddingbacksomeexposure,asChina'smacroclimatestartedtoshowsignsofstabilization.

Exhibit6:ActiveweightsofChina/HKequitiesbyregionalfundcategoryandmanagerdomicile

AUM:

US$722bn

AUM:

US$231bn

AUM:

US$61bn

AUM:

US$97bn

AUM:

US$159bn

AUM:

US$108bn

US

Managers

non-US

Managers

US

Managers

non-US

Managers

US

Managers

non-US

Managers

GlobalEquityFunds

AxJEquityFunds

EMEquityFunds

Oct-22Dec-22Jun-23Dec-23Jan-24Feb-24Mar-24Apr-24

Source:MorningStar,FactSet,EPFR,MorganStanleyResearch;dataasofApril30,2024.Notes:funduniverseofeachcategoryisformedbythelargest30activemutualfundsunderMorningStarregionalcategory.Fundsunder"non-USManagers"aremostlydomiciledinEurope.WeexcludeESGfunds,incomefunds,andsystematicfunds.AllthecoveredfundsarebenchmarkingtoeitherMSCIorFTSEstandardregionalindicesofAll

CountryWorld,AsiaexJapan,orEmergingMarkets.

What'snext–muchsmallerunderweightpositionsinChinasuggestahigherhurdle

forallocationfromhere:ThesamechartaboveshowsthatAprilhadalreadyobserved

quitesizablerepairofUSpositioninginChineseequitiesbygloballong-onlyinvestors.Forexample,globalmandateportfoliomanagers(whohavetotalAUMofUS$722bn)arenow1.4pptunderweightinChineseequities,comparedto2.0pptjustamonthbefore.PMsofAxJandEMmandateshavealsoreducedtheirunderweightpositionsinChinabyupto0.8-1.2pptduringApril.Thissuggeststhatgloballong-onlypositioninginChinahaslargely

recoveredtosummer2023'slevel.

WebelievethatthehurdleformeaningfulreductioninunderweightpositionsfromherewillbemuchhigherandwillneedtobedrivenmainlybyimprovementinChina'sdomesticmacroconditions–inotherwords,stabilizationandpotentialimprovementinprivate

consumption,housingsales/construction,andultimatelydeflationarypressure.

MorganStanleyResearch7

8

Update

WhereEarningsandValuationStand

Tooearlytocallforanearningsinflectionpoint

Wehadtheworstquarterlyearningsresultsseasonin4Q2023sincewestartedtrackingfrom2Q2018,andtheresultssofarfor1Q2024arenotclearenoughtoconcludethataninflectionisontheway.1Q2024A-sharemarketreportingshowsthatanet27%ofA-

sharecompanies(bynumberofcompanies)havemissedconsensusestimates.Thisis

indeedasmallernumbercomparedtothe38%in4Q;however,aone-offquarterly

improvementhadhappenedinthepast,butthesustainabilitycannotbeguaranteed(see

4Q2022and1Q2023).Meanwhiletheconsensusearningsestimatesrevisionbreadthchart(Exhibit8)showsthatthedowntrendisstillaccelerating,whichcouldbecappingre-

ratingopportunities.

Exhibit7:HistoryofChineseequitymarketquarterlyearningssurprisesbynumberofcompanies

MSCIChinaMSCIChinaAOnshore

20%10% 0%-10%-20%-30%-40%

-50%

-36%33%

17%

12%12%

9%10%9%

53%8%8%

-12%-1519%-13%-1--23%-20%-221-%%-25%-1-%6%-2-%4%-1-%0%-29%30%-27%

-910%-6%-3%-7%

-38%

2Q2018

3Q2018

4Q2018

1Q2019

2Q2019

3Q2019

4Q2019

1Q2020

2Q2020

3Q2020

4Q2020

1Q2021

2Q2021

3Q2021

4Q2021

1Q2022

2Q2022

3Q2022

4Q2022

1Q2023

2Q2023

3Q2023

4Q2023

1Q2024

Source:MSCI,Bloomberg,RIMES,Factset,MorganStanleyResearch.DataasofMay2,2024.

Exhibit8:12-monthforwardconsensusearningsestimaterevisionbreadth(ERB,3mma)

6% 4% 2% 0% -2% -4% -6% -8%-10%

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

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Jul-24

MSCIChinaERB(3mma)A-shareERB(3mma)

Source:IBES,Rimes,MSCI,MorganStanleyResearch.WeeklydataasofMay6,2024.EarningsEstimateRevisionBreadth(ERB)=(numberofupwardrevisions-numberofdownwardrevisions)/totalnumberofestimates.

Valuationisnowatacriticalleveltobreakorretreat

MSCIChinanowtradesat9.9x12-monthforwardP/Ewitha19.8%discountvs.MSCIEM.Itiswellworthnotingthatthecurrentvaluationlevel,bothinabsoluteandrelative

terms,isataquiteimportantlevelcomparedtothehistoricaltradingrange.

~10xhadbeenhistoricallybeenthelowerboundofMSCIChina'sP/Evaluationrangesince2017(afterChineseADRsgotfullyincludedinMSCIindices,weconsiderthevaluation

levelpriortothataslesscomparablegiventheindexuniversedifference).Thetwobreaksthroughthislevel–October2022andthemostrecentcycleaftersummer2023–werebothtiedtoconcernsaboutChina'slong-termgrowthpolicyandtrajectory(Covid

lockdownin2022andpersistentdeflationsince2H2023).Meanwhilethe20%discountvs.EMhadalsobeenthemaximumdiscountsinceOctober2015,untilthemostrecentcycle.

Morganstanley

RESEARCH

Update

+1SD

_____MSCIChinaFwdP/E

5yraverageofMSCIChinaFwdP/E

—MSCIChinaP/Epremium/(discount)%toMSCIEM(RHS)

Exhibit9:MSCIChina12-monthforwardP/Evs.MSCIEM–MSCIChinacurrentlytradesata19.8%discountvs.MSCIEM

20.0x

18.0x

16.0x

14.0x

12.0x

10.0x

8.0x

6.0x

_____MSCIEMFwdP/E

-1SD

Jan-10

Jul-10

Jan-11

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Jul-24

50%

40%

30%

20%

10%

0%

-10%

-20%

-30%

-40%

Source:DataStream,MSCI,MorganStanleyResearch.DataasofMay6,2024.

Therefore,itwillbecriticaltoseewhetherChina'svaluationandtheequityriskpremiumassociatedwithinvestinginChinacanrecovertowithinhistoricalrange(~10xandabove,<20%discountvs.EM),orifChinawillbesubjecttoapersistentlylowervaluationregimethanbefore.

Webelievetheanswerhasthreeparts:

1.Thefundamentals:ItremainstobeseenwhetherChinacansuccessfullyreflateitseconomyandletpositiveandfasterearningsgrowthdrivetheequitymarketreturnshigher.

2.Policydirection:ThepriorityofeconomicgrowthinthepolicyagendaofChina'stopleadersisstillbeingdebatedasthehousingmarketslowdowndragson

furtherandlacklusterconsumptionmomentumcontinues.

3.Geopoliticalconcerns:AsmentionedintheTheGlobalContextsection,

geopoliticalcomplexityismorelikelytorisethanabateaswegothroughtheUSelectionseasonandasChinafacesmoreheadwindagainstoverseastradeand

transactions.SomerecentdevelopmentsincludePresidentBiden'ssigningof

bipartisanlegislationonApril24thatwillbanasocialmediaappintheUSunlessitsChineseownergivesupcontrolofit.Also,ReutersreportedthattheUShas

preliminarilydiscussedsanctionsonsomeChinesebanks.Ofcourse,wenotemoreactivediplomaticengagementbetweenChinaandothercountries,includingthe

recenttripstoChinabyUSCabinetmembersBlinkenandYellen,aswellasavisitbyGermany'sChancellortoChina.PresidentXiiscurrentlytravelinginEurope

withplannedstopsinFrance,Serbia,andHungary.

MorganStanleyResearch9

Update

10

LatestPriceTechnicalsinChina

GilbertWong,JasonNg

NavigatingtheflowdynamicsofChina/HKequitiessinceFebruary:MarketvolatilityofChineseequitieshasbeensubstantiallyhigherthanthatofothermajormarketsinAsia

andgloballyin2024YTD(Exhibit10).TherealizedvolatilityofChineseoffshoreequitieswasparticularlyhigh,around2xgreatervs.othermajormarketindices.

ThisnaturedidlimittheactiveriskbeingtakenonChinabylong-onlymutualfund

managersandlong-shorthedgefundmanagersintheirportfolios,becauseeveryunitofrisktakenonChinawouldmeantwounitsofrisktakenonothermarkets.Webelievethishasbeenoneofthedriversforlong-onlymutualfundmanagerstostarttrimmingtheirunderweightChinapositionsinChinasinceFebruary,asrealizedvolatilityofChinese

equitieshitacyclicalpeakaroundlateJanuaryfollowingtheA-sharesmall-midcapcorrection.

Exhibit10:60-dayrealizedvolatilityofChineseequitiesvs.othermajormarkets

35%

30%

25%

20%

15%

10%

5%

0%

AsianEquities

US/EUEquities

32.6%

China/HKEquities

22.6%

20.6%

190%

17.7%

16.1%

16.0%

17.5%

.

10.4%10.6%10.2%10.5%

12.3%

9.4%9.3%

13.0%

7.7%

ASX200KLCI

EUROSTOXXNASDAQ

STI

HSTech

BSE200

HSCEI

KOSPI

HSI

TOPIX

MSCIChina

FTSE100

TAIEX

CSI300

ThaiSET

S&P500

Source:FactSet,MorganStanleyResearch;dataasofMay6,2024

Concurrently,wealsonotedcoveringofChineseshortpositionsinFebruary(Exhibit11),whichwebelievewasareflectionofcrowdedshortunwindingamongsomeglobalhedgefunds.Theseactivitiesarebothdrivenbyriskmanagementprocess,notfundamental

reasons.However,theseflowdynamicsbenefitedChineseequitiesfromamarketmicro-structureperspectivetotrendhigherinFebruaryandMarch,formingtheearlybackdropforglobalquantfundswithCTAstrategy(i.e.,commoditytradingadvisorwithtrend

followingstrategy)tostepintobuildlongbetaexposureinApril.

Morganstanley

RESEARCH

Update

Jan-23

Feb-23

Mar-23

Apr-23

May-23

Jun-23

Jul-23

Aug-23

Sep-23

Oct-23

Nov-23

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Feb-24

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Apr-24

4000

2,878

3000

2,693

(551)

(66)

1,794

2000

1,520

1,115

791

1000

373

243

0

-1000

(963)

(1,063)

(1,076)

(1,169)

-2000

(1,693)

(2,309)

-3000

Exhibit11:MonthlyflowsrelatedtoshortinterestinChineseequities(US$mn)

Source:IHSMarkit,MorganStanleyResearch;notes:positivemeansthemarketvalueofnewshortadded;negativemeansthemarketvalueofshortsbeingcovered.

RisksbehindtherecentuptrendinChina:Basedonourestimates,therallyinChinafrommid-Aprilonwardwasdominatedbyglobalquantfunds'buying.TheuptrendinChinaanddowntrendinUStriggeredaclassicalmomentumreversalandmarketrotation.The

estimateddailyinflowsfromCTAquantfundstolongChina/HKequityindexfutureswerearoundUS$2-3bn.TheHSIwasup12.3%fromMarch28toMay6andsits13%aboveits100-daymovingaverage(Exhibit13).

However,fromaquantperspective,theriskbehindtherecentaccelerateduptrendisaquickturnaroundofglobalquantfundpositioning.

Lookingintothepast10yearsofhistorysinceMay2014,weseeahightendencyformean-revertingbehaviorwhenHSIis10%aboveits100-daymovingaverage(Exhibit14):Wesampledfiveepisodesinthepast10years.Onaverage,weseepositive2.8%

returnoverthenextmonth,butthatfadedonathree-monthto12-monthhorizon,rangingfrom-2.3%to-13.2%.Giventhatglobalquantfundsusuallywouldhavearisk-control

mechanismtoavoidchasingfurtherintoalate-stagerallywithoverboughtcharacteristics,webelievetheinflowstoChina/HKequitiesdrivenbyCTAfunds'buyingmightturn

aroundquicklyinthenearfuture.

Overthelasttwomonths,therealizedvolatilityofChineseequitieshasbeenmoderating(Exhibit12),andbothmutualfundsandhedgefundshavelargelyadjustedtheirpositionstoaddressthereshuffledmarketrisklandscape.Thus,webelievefurthertailwindfrom

flowstofavorChineseequitieswillbelimitedfromnowon,ifnofurtherpositivemacrocatalystsemerge.

MorganStanleyResearch11

12

Morganstanley

RESEARCH

Update

Exhibit12:Historicaltrendof60-dayrealizedvolatilityofChina/HKequitiesindices

50%

45%

40%

35%

30%

25%

20%

15%

10%

Jul-2023

Aug-2023

Sep-2023

Oct-2023

Nov-2023

Dec-2023

Jan-2024

Feb-2024

Mar-2024

Apr-2024

May-2024

—HSTechHSI—MSCIChina

Source:FactSet,MorganStanleyResearch

Exhibit13:HangSengIndexvs.100-daymovingaverage

35000

33000

31000

29000

27000

25000

23000

21000

19000

17000

15000

30.0%

20.0%

10.0%

0.0%

-10.0%

-20.0%

-30.0%

—HangSeng-Price—HangSeng-MA-100D

—%above/belowMA100

Source:FactSet,MorganStanleyResearch.DataasofMay6,2024

Morganstanley

RESEARCH

Update

Exhibit14:LastfiveepisodeswhenHangSengIndexwas10%aboveits100-daymovingaverage

HangSengIndex

1M

IndexPriceChange%3M6M

12M

4/9/2015

26944

2.35%

-7.31%-20.18%

-24.49%

9/5/2016

23650

0.17%

-3.26%0.39%

15.87%

1/16/2018

31905

-4.35%

-3.44%-11.26%

-21.44%

1/12/2021

28277

6.23%

1.49%-1.12%

-18.26%

1/3/2023

20145

9.56%

1.26%-4.83%

-17.49%

5/2/2024

18207

?

??

?

Average

2.79%

-2.25%-7.40%

-13.16%

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