A-share sentiment cools, and Morgan Stanley continues to prefer Hong Kong stocks in the near term
AI summary card
A-share sentiment cools, and Morgan Stanley continues to prefer Hong Kong stocks in the near term
The report finds that A-share investor sentiment weakened due to declining turnover, liquidity pressure from the CXMT IPO, and a pullback in global AI trades, while Hong Kong stocks offer a more independent cycle and greater resilience in the near term.
- The weighted MSASI fell 5 percentage points from July 22 to 32%, while its 1-month moving average fell 4 percentage points to 53%.
- Turnover in ChiNext, A-shares, and stock index futures fell 24%, 21%, and 22%, respectively, while margin financing balances declined 3%.
- Southbound flows recorded a net outflow of US$2bn from July 23 to 29, but remained a net inflow of US$9.2bn month-to-date and US$47.7bn year-to-date.
- The report prefers Hong Kong stocks in the near term, citing lower exposure to crowded global AI trades, greater resilience relative to emerging markets, and improving domestic fundamentals and liquidity.
- Over the longer term, the report remains constructive on A-shares, particularly accelerating earnings growth in technology and innovation sectors.
Report interpretation
Overview
Morgan Stanley notes that sentiment in the A-share market has weakened further, mainly due to contracting turnover, liquidity overhang pressure from the large CXMT IPO, and a pullback in global AI trades. Nevertheless, the report is not broadly bearish on Chinese equities; rather, it emphasizes a stronger tactical preference for Hong Kong stocks in the near term while remaining positive on A-share technology and innovation sectors over the longer term.
Core views
The core view is that A-share sentiment and liquidity indicators have weakened in the near term, making Hong Kong stocks relatively more attractive. Supporting factors for Hong Kong stocks include a more independent equity cycle, lower exposure to crowded global AI trades, greater resilience relative to broad emerging markets, a bottoming in second-quarter earnings, stabilizing liquidity after the IPO supply shock, and the spread of AI trading into data centers and cloud services, benefiting large Chinese internet and cloud companies listed in Hong Kong. On the policy front, the July Politburo meeting conveyed “fine-tuning rather than strong stimulus,” with the focus on deploying approximately Rmb2tn of remaining fiscal and quasi-fiscal support rather than launching a new round of large-scale stimulus. September to October remains an important potential window for policy easing.
Analysis framework
The report uses the MSASI as the core framework for A-share sentiment and technical signals, tracking 12 indicators including turnover, margin financing, futures, options, RSI, the number of limit-up stocks, passive foreign fund flows, and earnings estimate revisions. It combines these with macro policy, IPO supply shocks, southbound flows, and changes in Hong Kong stocks’ relative fundamentals to form a cross-market allocation view.
Methodology notes
Weighted A-share sentiment indicator
The MSASI is constructed from 12 market sentiment and trading activity indicators. Each indicator is first normalized to a 0–100 range using its 100-day rolling minimum and maximum, and then weighted according to its historical explanatory power for the CSI 300.
Normalized Value = (Latest Value - Min Last 100 Days) / (Max Last 100 Days - Min Last 100 Days)
This method makes data with different units and frequencies comparable, reduces high-frequency noise, and more clearly highlights medium-term improvements or deterioration in sentiment.
1-month moving average of weighted MSASI
A 1-month moving average is applied to the weighted MSASI to reduce short-term volatility and provide a clearer reflection of medium-term sentiment trends.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Hong Kong stocksShort-term tactical preference
- Strengths
- More independent market cycle, lower exposure to crowded global AI trades, greater resilience relative to emerging markets, improving second-quarter earnings, and stabilizing liquidity.
- Weaknesses
- Still potentially affected by global market volatility and short-term southbound outflows.
- Comparison
- Compared with A-shares, Hong Kong stocks should benefit more in the near term from low positioning, improving liquidity, and the spread of AI trading into data centers and cloud services.
- Risks
- Further deterioration in global risk appetite, continued tightening of fund flows, and earnings improvement falling short of expectations.
- A-sharesCautious in the near term, constructive over the longer term
- Strengths
- Earnings growth in technology and innovation industries is expected to accelerate over the longer term, with hard technology and infrastructure among policy priorities.
- Weaknesses
- Near-term weakening in the MSASI, declining turnover, potentially greater liquidity pressure from the CXMT IPO, and still-negative breadth of earnings revisions.
- Comparison
- Under pressure relative to Hong Kong stocks in the near term, but still supported over the longer term by the potential for new cyclical highs in hard technology and innovation supply chains.
- Risks
- Insufficient policy easing, IPO-related liquidity shocks, a continued pullback in global AI trades, and no improvement in earnings revisions.
Key data
- Weighted MSASI32%Down 5 percentage points from July 22.
- Weighted MSASI 1MMA53%Down 4 percentage points over the same period.
- ChiNext TurnoverRmb509bnDown 24%.
- A-share TurnoverRmb2,107bnDown 21%.
- Stock Index Futures TurnoverRmb574bnDown 22%.
- Margin Trading BalanceRmb2,652bnDown 3%.
- Southbound Net OutflowUS$2bnFrom July 23 to 29; month-to-date net inflow of US$9.2bn and year-to-date net inflow of US$47.7bn.
- Remaining Fiscal and Quasi-fiscal SupportApproximately Rmb2tnThe policy focus is on accelerating implementation rather than introducing additional strong stimulus.
Impact & implications
The implication for asset allocation is that investors should focus on the tactical advantages of Hong Kong stocks over A-shares in the near term, particularly against a backdrop of rising global volatility, declining A-share turnover and sentiment indicators, and liquidity disruptions from IPO supply pressure. Over the medium to long term, investors should not overlook the potential for accelerating earnings and a recovery in market leadership among A-share technology and innovation sectors.
Risks
- The large CXMT IPO could tighten A-share liquidity and increase short-term market volatility.
- A continued pullback in global AI trades could further weigh on technology sentiment and risk appetite.
- Policy remains focused on fine-tuning rather than strong stimulus, with limited incremental support for consumption and property.
- The breadth of earnings estimate revisions remains negative; although it has improved marginally, a trend reversal has not yet been confirmed.
- If short-term net southbound outflows continue, they could weaken Hong Kong stocks’ relative performance.
What to watch
- Whether the weighted MSASI and MSASI 1MMA can stabilize and rebound.
- Changes in A-share, ChiNext, and stock index futures turnover, as well as margin balances.
- Whether market liquidity pressure eases after the CXMT IPO.
- The potential policy easing window from September to October and the implementation of “actually effective” measures.
- Hong Kong stocks’ second-quarter earnings, liquidity after IPO lock-up expiries, and the spread of AI trading into data centers and cloud services.
- Whether the breadth of earnings estimate revisions turns positive.