Our Chief Asia Economist Chetan Ahya and Chief China Equity
Strategist Laura Wang unpack Asia’s broadening economic recovery
and focus on China’s path to market stability in 2026.
Read more insights from Morgan Stanley.
----- Transcript -----
Laura Wang: Welcome to Thoughts on the Market.
I'm Laura Wang, Morgan Stanley's Chief China Equity Strategist.
Chetan Ahya: And I'm Chetan Ahya, Chief Asia
Economist.
Laura Wang: 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.
Chetan, 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 percent this year so far.
What's your explanation for this surprise?
Chetan Ahya: Well, yes, Laura, you know, we were
all concerned that there will potentially be tariffs, especially
on China. And therefore, we were concerned that [the] regions’
exports may be affected negatively. However, what has happened is
that tech exports have driven the 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.
Laura Wang: That's great. How significant is the
shift in exports from tech to non-tech?
Chetan Ahya: Well, we think that's very
important for [the] regions’ economic outlook. Because when you
think about the tech exports recovery, it was helpful to keep
[the] 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.
Laura Wang: Your work suggests that Asia
inflation will pick up modestly in 2026. What factors are behind
this trend?
Chetan Ahya: 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.
Laura Wang: How will Asia central banks respond
to keep inflation within their comfort zones? And what does this
mean for monetary policy across the region in 2026?
Chetan Ahya: 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 pressure is reduced, we are
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?
Laura Wang: That’s right, 2025 was a very good
year for China equity market. We saw both MSCI China and Han Sang
Index delivering more than 30 percent return in absolute terms.
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 re-reading we've seen so far in
2025 is already more than 30 percent, close to 40 percent.
In [20]26, we think the valuation will largely stay at its
current level, and further upside for the market will be more
driven by solid earnings growth. For 2026, we see MSCI China's
earnings growth year-on-year at around 6 percent.
Chetan Ahya: So, with that backdrop, Laura, do
you expect more inflows into the market next year?
Laura Wang: 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&D and innovation heavy
sectors.
That being said, what we are seeing also is relatively light
positioning by global 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 China.
Chetan Ahya: And with the U.S.-China tensions
easing a bit, and China doubling down on AI and smart
manufacturing, where do you see the real-world opportunities from
that?
Laura Wang: 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 earnings growth in the
next few years. And we also want to highlight the next five years
growth strategy laid out by Chinese policy makers.
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&D and innovation – and that would include AI as
well as smart manufacturing, automation, robotics, and biotech.
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.
Chetan Ahya: 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?
Laura Wang: 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&D focus.
Along these opportunities, we're also heavy 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.
Chetan Ahya: Great speaking with you, Laura.
Laura Wang: And thanks for listening. 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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