After warning of valuation and macro risks in China’s stock markets just before their crash in February last year, the chief Asia and emerging markets strategist for Morgan Stanley thinks it’s too early to call a trough. His caution contrasts with Goldman Sachs Group Inc. and others, whose strategists expect double-digit gains from Chinese stocks this year.

“How long, or further, can this bear market last?” Garner said in a January 11 interview with Bloomberg News, citing threats from the omicron variant as well as rising US interest rates. “Our judgment is that we are getting closer to the end, but unfortunately we believe further downgrading of the growth portion of China and emerging markets is likely.”

Its year-end targets for Hong Kong’s Hang Seng index and the mainland’s CSI 300 index are 25,000 and 5,250 respectively, suggesting little upside for the former and nearly 10% gain for the latter. at market close on Friday.

Chinese stocks started 2022 on a high after last year’s tumble, as investors bet Beijing’s worst regulatory crackdown was over and hoped monetary policy easing would add tailwinds .

The Hang Seng China Enterprises index is up more than 6% so far in 2022, outperforming the S&P 500 index which had lost almost as much as Friday in Hong Kong. This divergence was partly driven by the People’s Bank of China’s pledge to take more action to support the economy, while the Federal Reserve has made it clear that interest rate hikes will begin in earnest from March. .

However, for Garner, the declining return on equity of Chinese companies and property defaults are still of concern. The ROE of the MSCI China index peaked during the 2007-2008 cycle at 18% and currently stands at 12%, according to Morgan Stanley.

Here are highlights from the interview with strategist and author Garner, 56, as he discusses market views and his experiences in the market.

What are the key indicators you watch to decide the turn of the market?
It comes down to earnings, valuations and technicals, but ultimately we will likely need more stimulus from China. We are also watching developments in the real estate sector, and this global write-down of growth stocks and how that is unfolding.

Have you faced client skepticism about your calls as valuations have fallen significantly?
Yes, there has been a lot of active debate. It’s true that absolute and relative valuations have become much more reasonable than a year ago, but we’re also watching the kind of questions like — Why are you paying here? What is the trend in corporate return on equity? In China, unfortunately, corporate return on equity is declining both in absolute and relative terms.

What drove you down on Chinese stocks in January last year?
Our earnings model presented significant risks to bottom-up consensus, both in China and in emerging markets. China was trading close to two standard deviations from medium-term history.

We knew that a lot of money had come into the market very quickly, but that had pushed valuations to excess. And it was based on a macroeconomic and earnings outlook that we didn’t believe. We argued in November that we were not yet at the bottom of the earnings cycle.

What is your boldest move in the markets right now?
I think it would be this long-term call on the “financialization” of savings. As Asian investors shift away from banking and real estate focused portfolios to holding equities, there is a multi-trillion dollar investment theme that is just beginning. And it’s not just a story of China. Asian investors will lead the Asian markets and hold mutual funds, private equity funds and hedge funds.

How has the story of China changed since you covered this market?
China has gone from marginal in global investor debates to central. When I was writing research notes and then the book “The Rise of the Chinese Consumer” in 2005, many investors were very skeptical. They could not conceive that Chinese consumers would become as important, if not more important, to sectors and businesses than those in advanced economies.

Do you consider yourself a lifer in Hong Kong?
I think the future is extremely bright for the area I work in – which is the financialization of savings here in Asia – and Hong Kong is a great place to do that. In this industry, including here in Hong Kong, we have a real commitment to diversity and inclusion.

At Morgan Stanley, we have seen a growing trend of female representation at the corporate level. Our representation of women in leadership positions has increased by a third since I started working at Morgan Stanley.

What have been the most vulnerable moments of your career?
I was probably most vulnerable when the Asian and Russian crisis started in 1997-98, when I was just getting started. And again, during the global financial crisis, I made a very obviously wrong call that Asian markets could decouple from the subprime problem in the United States.

The Asian markets finally came back very strongly in line with my point of view. Right at the end of 2008, when the famous 4 trillion yuan stimulus package was announced, I was actually in Beijing. I remember being very excited, seeing this and realizing what it could do for the market in 2009.