Morgan Stanley Sees 26% Gain for Chinese Shares in H.K.

Morgan Stanley is forecasting gains of about 26 percent for Chinese stocks listed in Hong Kong amid low valuations and expectations for improving company earnings and economic growth this year.

The brokerage expects the Hang Seng China Enterprises Index of so-called H shares to rise to 13,400 by the end of the year, analysts including Jonathan Garner wrote in a report today, compared with the gauge’s previous close of 10,640.16. Morgan Stanley predicts Hong Kong’s benchmark Hang Seng Index to rise to 23,600, 15 percent above its last closing level, while the MSCI China Index may rise 20 percent to 70.

The H-share index gained 7.1 percent in the three months through last week for its second straight quarterly gain. The gauge sank 7.2 percent since March 5 when China unveiled a lower annual target for the nation’s gross domestic product. The measure trades for 8 times estimated profit, a 22 percent discount to the Hang Seng Index’s 10.3 multiple, according to data compiled by Bloomberg.

“We are going to look at sequential acceleration from the second quarter onwards, probably accompanied by additional gradual policy easing,” Garner said in a telephone interview from Hong Kong today. “That will lead to a better price-to-earnings re-rating of the H-shares because that’s more influenced by China GDP growth.”

The H-share gauge rose 0.2 percent as of the close in Hong Kong today, while the Hang Seng Index dropped 0.2 percent. The MSCI China Index lost less than 0.1 percent.

Fine Tuning

Morgan Stanley increased its estimate for China’s 2012 gross domestic product to 9 percent from 8.4 percent, according to an e-mailed research report on March 29. A Purchasing Managers’ Index rose to a one-year high of 53.1 in March, China’s logistics federation and the National Bureau of Statistics said yesterday.

Premier Wen Jiabao has pledged to “fine-tune” economic policies as needed as weakness in export demand and a cooling housing market restrain an economy that probably grew at the slowest pace in almost three years in the first quarter.

“It’s really those two things -- the degree of cheapness of the market and the prospect for change in perception about China’s growth” that will support the shares of Chinese companies traded in Hong Kong, Garner said.

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