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- [00:01]
A
Welcome to Thoughts on the Market. I'm Laura Wang, Morgan Stanley's Chief China Equity Strategist.
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And I'm Chetan Aya, Chief Asia economist.
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Today our 2026 macro outlook for Asia with a particular focus on China's equity market. It's Wednesday, December 10th at 10am in Hong Kong.
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Chadon as 2025 draws to a close and if we try to remember what we were thinking about this time last year, I think probably a lot of the market participants were expecting headwinds going into 2025 on the exports and trade front. But turns out that Asia's export growth is tracking at 8% this year so far. What's your explanation for this surprise?
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B
Well yes Laura, you know we were all concerned that there will potentially be tariffs, especially on China and therefore we were concerned that region's exports may be affected negatively. However, what has happened is that tech exports have driven this strength in the overall exports for the region and that is all because of the story on AI and tech development that we have all been watching. But the good news is that non tech exports will recover in 2026. In fact that's the key call we are making that from early next year you will see that improvement in the U.S. domestic demand that helps Asia's exports. And at the same time we are expecting that bulk of this tariff related uncertainty would be behind us. And so those are the two factors we think will support this recovery in non tech exports in 2026.
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A
That's great. How significant is the shift in exports from tech to non tech?
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B
Well we think that's very important for regions economic outlook because when you think about the tech exports recovery it was helpful to keep regions overall exports growth strong but it did not have the broader multiplier effect on the economy. So for example when you think about the tech exports it tends to be more capital intensive and we don't see much benefit on job growth. I think the best example I can give you is when you look at the Taiwan economic numbers, we've seen very strong GDP growth year to date but at the same time consumption numbers have been very weak. And so non tech exports recovery is very important for the broader economic recovery. And that is precisely what we expect in 2026. You will see that broadening out of growth with follow up in capex job growth and consumption recovery.
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A
Your work suggests that Asia inflation will pick up modestly in 2026. What factors are behind this trend?
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B
Well as the non tech exports recovery materializes, you should see improvement in capacity utilization across the board in the region, that should reduce the disinflationary pressures that we've been seeing year to date. And at the same time, we are expecting that the disinflationary pressures that the region was facing from China is also going to ease in 2026.
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A
How will Asia's central banks respond to keep inflation within their comfort zones? And what does this mean for monetary policy across the region in 2026?
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B
Well, actually, there's not much concern about keeping the inflation within the central bank's comfort zone because what we've seen year to date in Asia is that inflation has been much lower than the central bank's target for a number of economies in the region. And they have been responding to this with more interest rate cuts. But going forward, as disinflationary pressures reduced, we're expecting that the central banks in the region would end their rate cutting cycle. We should see just about one to two more rate cuts for some of the central banks and then policy rates should remain largely stable through to the end of 2026. So, Laura, let me come to you now. So 2025 was a very strong year for China markets and you see 2026 as a keep it steady year rather than a breakout year. What does stability look like for investors and companies?
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A
That's right. 2025 was a very good year for China equity market. We saw both MSCI China and Hang Seng Index delivering more than 30% return in AB going into 2026. We see it as a year for investors and for the market to preserve and protect what has been achieved in 2025 so far, but not with significantly much higher upside at this point. This is because the valuation rereading we've seen so far in 2025 is already more than 30%, close to 40% in 26. We think the valuation will largely stay at its current level and further upside for the market will be more driven by solid ear.
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For 2026, we see MSCI China's earnings growth year on year at around 6%.
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B
So with that backdrop, Lara, do you expect more inflows into the market next year?
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A
Absolutely. Actually, we have already talked to so many investors on a global basis and we are seeing much higher level of interest in investing in Chinese equities, particularly in some R and D and innovation heavy sectors. That being said, what we are seeing also is relatively light positioning by investors in Chinese equities. Actually across the board still a quite sizable underweight, which means there will be much higher room for them to increase their allocation gradually in 2026 back to.
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B
China and with the US China tensions easing a bit and China doubling down on AI and smart manufacturing, where do you see the real world opportunities from that?
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A
There will be a lot of opportunities inside Chinese equity market, but we do want to stay with the names that will be delivering very solid ear earnings growth in the next few years. And we also want to highlight the next five years growth strategy laid out by Chinese policymakers. We want to make sure that we focus on the sectors that are very well aligned with the national growth strategy with a strong focus in R and D and innovation and that would include AI as well as smart manufacturing, automation, robotics and biotechs. We also have collected very high level of interest from global investors in these sectors. At the same time, as we start to see less deflation pressure in 2026 but still with it potentially persisting into 2027, we want investors to still hold on to some exposure to high quality dividend plays. The steady cash returns from these stocks will help you navigate through some volatilities in the market in next year.
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B
So you expect global investors, returning mainland investors shifting money from savings into stocks and strong cross border trading within Hong Kong. What does that mean for market behavior and thematic opportunities?
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A
One very positive development we have observed in 2025 is the strong capital market activities in Hong Kong. Hong Kong at single stock exchange basis actually is the most active IPO market in the world in 2025 and with policy support for Hong Kong to continue as a global financial hub, we expect this trend to continue. So we are seeing more and more capital market activities happening in Hong Kong and Mainland China in the next year. And in terms of thematic opportunities, I already mentioned that opportunities align with the national growth strategy with very heavy innovation and R and D focus along these opportunities. We're also heavily recommending investors to focus on thematic opportunities such as anti evolution as well as corporate governance reform that summarizes our New Year outlook for Asia economy as well as China equity market. Chetan, thanks so much for taking the time to talk to me.
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Great speaking with you Laura and thanks for listening.
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If you enjoy thoughts on the market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.
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