Morgan Stanley says China's market will be the biggest winner in 2023 and these stocks stand out

Published Thu, Jan 19 20237:48 PM EST

Wall Street is excited about China's reopening. Since the turn of the year, investment banks have become increasingly bullish on the world's second-largest economy, upgrading their outlook on its stocks. But Morgan Stanley is going even further: It's predicting that Chinese stocks will beat global markets this year. "We are getting even more bullish on Chinese equities after turning very constructive on the market at the beginning of December last year," Laura Wang, Morgan Stanley's chief China equity strategist, told CNBC's " Street Signs Asia " on Wednesday. The bank predicts upside of around 15% for both the MSCI China Index and the Hang Seng Index before the end of 2023, driven by stronger earnings recovery. That's in contrast to the "low single-digit returns" it's expecting for U.S. and European markets. "This actually implies that the Chinese equity market will top global equity market performance for 2023. So, this is the time to get back into China," Wang said. Wall Street is already bullish on China — but not enough, according to Wang. "We believe the market is under-appreciating the far-reaching ramifications of reopening and the possibility that a robust cyclical recovery can occur despite lingering structural headwinds," Wang wrote in a Jan. 9 note titled "Even more bullish." Stock picks Wang said the "number one trade" she would recommend to investors is to buy "large-cap, highly liquid" Chinese internet names. She said the internet sector has a "very high correlation" with the consumption pick-up in China and should benefit from inflows from institutional names. "Global institutional investors are still quite significantly underweight these large-cap liquid names. And as global investor sentiment about China continues to recover, they need to close or at least narrow these underweight positions. And the most straightforward trade is to get back into the internet names. So, we do expect a lot of fund flows and as a real looking back into the sector," Wang added. Morgan Stanley's top pick in the sector is Alibaba , with a price target of $150. That's around 30% higher than current levels. Alibaba is well placed to benefit from a consumption recovery in China and a "reacceleration" in cloud revenue, according to the bank. It forecast that the company will achieve compounded earnings before interest, taxes, depreciation, and amortization (EBITDA) growth of 18% into 2026. The bank is also advising investors to buy domestic reopening beneficiaries. The bank's top picks include Yum China , Wuliangye Yibin , Budweiser Brewing Company APAC, Samsonite , Cathay Pacific and Swire Pacific . A third trade that the bank is recommending is to cut exposure to A-shares while accumulating offshore stocks, such as Hong Kong-listed stocks and American Depository Receipts, which refers to U.S.-listed Chinese companies. While the bank noted that the MSCI China Index — which includes both A-shares and foreign listings — has already outperformed the CSI 300 by 11% as of Jan. 5, it expects "a further leg for this trade." — CNBC's Michael Bloom contributed to this report