Morgan Stanley: China Market-Wise | Asia Pacific: Decoding China's Lagging Performance
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As of February 27, 2026, MSCI China declined 1.2% year-to-date, significantly underperforming the broader MSCI Emerging Markets (EM) index, which gained 15.3%. However, Morgan Stanley points out that emerging market outperformance has been almost entirely driven by three stocks: Samsung Electronics, SK Hynix, and TSMC. These three semiconductor giants contributed the entire 6.5 percentage point upward revision to MSCI EM 2026 earnings forecasts. Strikingly, the remaining 510 stocks in the EM index collectively posted an earnings revision of negative 0.1%. In contrast, MSCI China earnings revisions for 2026 and 2027 were revised upward by 1.4% and 1.9%, respectively, outperforming the broader emerging market ex-trio.
The report highlights that China's better-performing sectors, such as materials, energy, and industrials, hold disproportionately low weights within MSCI China. This underweighting is attributed to index construction rules, including the US NS-CMIC list restrictions and a mere 20% A-share inclusion factor. Meanwhile, the heavily weighted internet sector, which accounts for 39% of the index, has been dragged down by the ByteDance effect, intensifying e-commerce competition, and concerns regarding global AI disruption.
Morgan Stanley prefers the A-share market over offshore Chinese equities, citing expectations that national team flows may shift from net selling to net buying. The firm is overweight materials, industrials, and semiconductors, and has upgraded energy from underweight to equal-weight. Sinopec and GigaDevice were newly added to the focus list.