Morgan Stanley analysts are looking past growing warning signs on China's economy to predict a big rally in the country's stock market.
The Shanghai Composite Index may surge 42% from Jan. 3 levels, according to a report last week from the New York bank. Such gains would mark a turnaround from recent performance: The Shanghai index is down 1.2% in the past 12 months, even as stocks from developing countries have rallied 22% on average.
A big driver of Chinese stocks could be the capital controls the government has put in place to stem a recent tide of currency outflows; with less flexibility to move money out of the yuan, local investors may have little choice but to keep their money in the domestic stock market, according to the firm. And with markets such as bonds and real estate looking increasingly inflated, stocks may be the best choice.
Stricter foreign-exchange policies "will likely serve to bottle liquidity," wrote the analysts, Jonathan Garner, Laura Wang and Corey Ng. "The more explicit comments by the authorities on the need to rein in "asset bubbles" are referring to conditions in the property and bond market, and not stocks."
Morgan Stanley's bullish call comes as more investors, including Quantum Fund co-founder Jim Rogers, warn that China will struggle to manage an ongoing slowdown in its economy, the world's second largest, not to mention a debt burden that has ballooned in recent years. According to Bloomberg, Chinese debt has swelled to roughly 2.7 times gross domestic product, close to the level of three times that has triggered financial crises in some nations in years past.