Trump tariff to drive market volatility, China A-share market better positioned

Investing.com -- Morgan Stanley expects higher market volatility following the U.S. decision to sharply raise tariffs on China. The brokerage sees China’s A-share market as a better option for hedging and diversification amid trade tensions.

The latest tariff hikes bring the U.S. weighted tariff rate on China to 65%, among the highest globally. The market is adjusting to the potential economic impact and the risk of further U.S.-China escalation.

Morgan Stanley (NYSE:MS) believes China’s A-share market will be less volatile than offshore markets due to its retail-driven investor base and lower global market correlation. The firm recommends increasing exposure to A-shares in both China-focused and global portfolios.

While China’s economic growth may take a larger hit than during the 2018-19 trade tensions, Morgan Stanley expects the drag on corporate earnings to be smaller.

The MSCI China index generates only 13% of revenue outside China, with U.S. exposure below 3%.

Morgan Stanley highlighted Chinese companies with high U.S. revenue exposure that may face near-term headwinds.

These include GoerTek Inc, Lenovo, Luxshare Precision, BYD (SZ:002594) Electronic, Zhejiang Crystal-Optech, Universal Scientific Industrial, and WuXi AppTec.

Other firms on the list span sectors such as healthcare, technology, consumer goods, and industrials.

The firm advises monitoring the yuan’s movement, potential U.S.-China negotiations, and any major policy easing in China to offset the tariff impact.

Morgan Stanley maintains an equal-weight stance on MSCI China within its broader emerging markets framework.