Morgan Stanley: A-share sentiment has moved beyond the excessive-pessimism threshold; stock-specific opportunities are improving, but the index view remains cautious

What has changed in A-share sentiment?

As of 4 November, Morgan Stanley’s weighted A-share sentiment indicator had rebounded noticeably, rising above its 22% excessive-pessimism threshold for the first time in more than a month. The firm says that historically, after the indicator fell below this level, the market could rebound within one to two months.
Short-term sentiment has improved, but the one-month moving average, which smooths short-term fluctuations, was broadly unchanged at 13%. The indicator combines 12 data points, including trading volume, margin financing balances and revisions to earnings expectations, to gauge market sentiment and activity.
Compared with 28 October, turnover in ChiNext, A-shares and stock index futures increased by 6%, 7% and 16%, respectively; margin financing balances fell by 4% to RMB 2.296 trillion yuan.

Broad-based A-share ETFs tracked by Morgan Stanley recorded net inflows of RMB 201 billion yuan from 29 October to 4 November, indicating substantial liquidity support; on 4 November, the STAR 50 and ChiNext indexes rose by 10.0% and 6.4%, respectively.
The firm estimates that at least RMB 550 billion yuan, or about 70% of the RMB 800 billion yuan allocation for capital-market support tools, remains available. Policymakers are also stepping up efforts to promote the use of these tools.

Fundamental signals remain weak: the balance of upward versus downward revisions to consensus earnings expectations remains negative and deteriorated further last week. Morgan Stanley believes the recent rebound alone is not enough to justify turning positive on the index.
China’s official manufacturing PMI fell to 49.3 in October from 50.1 in September, below the market consensus of 49.9; the non-manufacturing PMI declined to 49.7 from 50.2, mainly weighed down by weakness in construction. The Morgan Stanley economics team believes a broad-based recovery in domestic demand remains uncertain.
Accelerated government bond issuance and the deployment of policy financing tools are expected to support investment, with the results depending on the actual implementation of projects; high input costs and incomplete price pass-through are also squeezing downstream margins.

The firm continues to favor onshore A-shares over offshore Hong Kong stocks, and prefers selectively choosing high-quality, oversold stocks rather than broad index exposure.
Its rationale is that the sharp October sell-off lowered the valuations of some fundamentally sound companies, improving the risk-reward profile at the time of purchase; key screening criteria include resilient earnings, healthy balance sheets and sustainable shareholder returns.