(Bloomberg) — The weighting of China’s tech shares in benchmark indexes is unlikely to return to levels seen at the beginning of the year and valuations will come down further, according to Morgan Stanley.
China’s equity market landscape is poised to reshape “profoundly,” Jonathan Garner, the bank’s chief Asia and emerging-markets strategist in Hong Kong, told Bloomberg Television.
“Platform internet companies’ share in the offshore market probably peaked at an all-time high of almost half of the market cap at the start of this year. We don’t think it will go back to that,” Garner said. “This will be the most significant of all the regulatory resets that China has done.”
China’s internet behemoths have nosedived amid a $1 trillion selloff in mainland and offshore shares as Beijing moves to curb anti-monopolistic practices, regulate data collection and clamp down on sectors that conflict with its social and economic goals. The Hang Seng Tech Index has lost more than a third of its value since a February high and the State Council on Wednesday signaled an overhaul of legislation through 2026.
The combined weighting of communication services and consumer discretionary stocks — sectors which contain the internet giants — has fallen to 51% of the MSCI China Index from a peak of 58% in January, according to data compiled by Bloomberg.
“You’re going to get an index that has many more tech hardware companies, clean energy plays in it” as China targets social, financial, national security and environmental risks, according to Garner.
As for valuations, the MSCI China Index will move to “a mid-single digit discount to the EM average,” trading around 13 times forward price-to-earnings, Garner said. The benchmark is currently on 14 times forward earnings, down from a high of just under 19 times in mid-February, according to data compiled by Bloomberg.
“Our advice remains to be cautious,” Garner said.
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