A-share sentiment improved, but short-term volatility remains high

Overview

This report is Morgan Stanley's research on China equity strategy and A-share sentiment. It notes that A-share investor sentiment improved from the previous period, mainly due to increases in ChiNext turnover, A-share turnover, and the 30-day RSI; at the same time, margin financing balances rose slightly and southbound funds continued to record net inflows. However, earnings revision breadth remains negative and deteriorated slightly, while the marginal improvement in property fundamentals also faces questions about sustainability.

Core views

The core view is that Chinese equities still have moderate upside through year-end, but short-term volatility is high. Positive factors include the possibility that e-commerce competition may ease as regulation tightens, potential LLM-related index rebalancing that could bring incremental inflows to Hong Kong equities, and China's strengthening position in global supply chains for upstream manufacturing and hard technology. Risk factors include uncertainty around a China-US leaders' meeting from May to July, the first-quarter earnings season, IPO share lock-up expiries, and the Middle East situation.

Analysis framework

The report uses MSASI as a composite indicator of A-share market sentiment and technical signals. The indicator consists of 12 sentiment, trading, fund flow, and fundamental revision metrics, which are first normalized using a 100-day moving min-max method, then weighted according to each metric's historical explanatory power relative to the CSI 300, and finally combined into a weighted sentiment indicator and its one-month moving average.

Methodology notes

• Market sentiment indicatorMSASI Weighted

  Weighted A-share sentiment indicator

  MSASI is built on 12 indicators, including ChiNext turnover, A-share turnover, equity index futures turnover, northbound turnover, margin financing balance, new SSE accounts, 30-day RSI, number of limit-up stocks, CSI 300 futures discount, CSI 300 call-put ratio, foreign passive fund flows into the CSI 300, and earnings revision breadth.

• Data standardization100-day moving min-max normalization

  Scale indicators with different frequencies and units to a 0-100 range

  The normalization formula is the latest value minus the minimum value over the past 100 days, divided by the difference between the maximum and minimum values over the past 100 days; a higher value indicates stronger sentiment or trading activity.

• Weighting methodR-squared weighting

  Assign weights based on historical explanatory power

  Each indicator's weight is based on the R-squared from a single-factor regression between its performance relative to its 100-day moving average and the CSI 300's performance relative to its 100-day moving average; indicators with stronger historical correlations receive higher weights.

• Trend smoothingMSASI Weighted 1MMA

  One-month moving average

  A one-month moving average is applied to weighted MSASI to reduce high-frequency volatility and observe the medium-term sentiment trend more clearly.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• A-shares

  The report continues to relatively prefer A-shares and uses MSASI to track A-share sentiment.

  Strengths

  Improved turnover, rising RSI, and a slight increase in margin financing balances have lifted the sentiment indicator from the previous period.

  Weaknesses

  The one-month moving average of weighted MSASI is still declining, and earnings revision breadth remains negative.

  Comparison

  The report explicitly states that it continues to prefer A-shares over offshore markets.

  Risks

  Short-term volatility could be amplified by a China-US meeting, the first-quarter earnings season, IPO lock-up expiries, and geopolitics.

• Hong Kong equities

  Hong Kong equities may be supported by incremental fund inflows from potential LLM-related index rebalancing.

  Strengths

  Southbound funds maintained net inflows, with year-to-date net inflows reaching US$28.6bn.

  Weaknesses

  The overall path remains affected by volatility in the Chinese equity market and external risks.

  Comparison

  Relative to A-shares, the report prefers A-shares more, but still maintains a year-end target of 27,500 for the Hang Seng Index.

  Risks

  Uncertainty around index rebalancing and fund inflows, as well as shocks from global risk events.

• CSI 300

  Serves as the core reference index in the MSASI methodology for measuring indicator explanatory power and market performance.

  Strengths

  Multiple trading and technical indicators are incorporated into the model through their relationship with the CSI 300.

  Weaknesses

  Earnings revision breadth and some sentiment indicators still show insufficient fundamental support.

  Comparison

  MSASI indicators are weighted based on their relationship to the CSI 300 and the 100-day moving average.

  Risks

  If the improvement in sentiment indicators does not continue, the CSI 300 may remain volatile.

• China real estate

  The report treats real estate as an important background factor affecting Chinese equity sentiment and macro expectations.

  Strengths

  The nationwide sales decline narrowed in March, second-hand home transactions in Beijing and Shanghai were stronger than expected, and price performance in tier-one cities improved.

  Weaknesses

  Listing volume and asking prices in lower-tier cities continued to deteriorate, household sentiment remains fragile, and the effect of policy easing may diminish.

  Comparison

  Tier-one cities are performing significantly better than second-tier and lower cities, with divergence widening.

  Risks

  The current momentum may be difficult to sustain, and the narrowing year-on-year decline in the second quarter may mainly reflect a low base rather than a genuine recovery.

Key data

• Weighted MSASI51%Up 6 percentage points from April 15.
• Weighted MSASI one-month moving average42%Down 1 percentage point from the previous period.
• ChiNext average daily turnoverRmb679bnUp 9% from the previous period.
• A-share average daily turnoverRmb2,464bnUp 8% from the previous period.
• Equity index futures average daily turnoverRmb378bnDown 2% from the previous period.
• Margin financing balanceRmb2,692bnSlightly increased from the previous period.
• 30-day RSI+7%Rose from the previous period during April 16-22.
• Southbound net inflowUS$3.3bnDuring April 16-22; month-to-date was also US$3.3bn.
• Year-to-date southbound net inflowUS$28.6bnAs of the report period.
• Nationwide property sales value-13% y-yAfter revision, March sales value declined year on year, narrowing from -20% in the first two months of 2026.
• Nationwide property sales area-7.4% y-yAfter revision, March sales area declined year on year, narrowing from -14% in the first two months of 2026.
• NBS prices of new and existing homes in 70 cities-0.2% m-mThe month-on-month decline in March narrowed from February.
• Tier-one city new home prices+0.2% m-mFlat in February.
• Tier-one city existing home prices+0.4% m-m-0.1% in February.

Impact & implications

For portfolios, the report conveys a strategy signal of 'moderate medium-term upside, high short-term volatility.' The improvement in A-share sentiment supports a recovery in risk appetite, but the one-month moving average is still declining and earnings revision breadth remains negative, implying that the sentiment improvement has not yet fully translated into a stable trend. The marginal improvement in property conditions helps macro expectations, but the report emphasizes that it is mainly driven by transactions in older and lower-priced homes in tier-one cities and should not be directly extrapolated into a nationwide recovery.

Risks

• Market volatility may remain elevated from May to July.
• There is uncertainty around a China-US leaders' meeting.
• The first-quarter earnings season may bring earnings and valuation disruptions.
• IPO share lock-up expiries may increase supply pressure.
• The Middle East situation may affect global risk appetite.
• Earnings revision breadth remains negative and deteriorated slightly from last week.
• The sustainability of the improvement in property sales is questionable, and lower-tier cities continue to weaken.

What to watch

• Whether weighted MSASI continues to rise and whether the one-month moving average improves again.
• Whether A-share and ChiNext turnover can remain elevated.
• Whether the 30-day RSI continues to strengthen or shows overheating signals.
• Whether southbound net inflows can continue.
• Whether earnings revision breadth can turn from negative to positive.
• Whether the strength of second-hand home transactions in Beijing and Shanghai spreads to more cities.
• Whether the narrowing in the decline of second-quarter property sales mainly comes from a low base or from a real recovery in demand.
• Progress in tighter regulation of e-commerce competition, LLM-related index rebalancing, and the realization of advantages in upstream manufacturing/hard-tech industrial chains.