Morgan Stanley's Bull-Bear Framework for China's E-Commerce Sector

Investing.com — In light of recent policy shifts and macroeconomic challenges, Morgan Stanley analysts have introduced a Bull-Bear Framework to assist investors in navigating investment opportunities within China's e-commerce sector.

According to the Wall Street firm, the overall outlook for China’s economy is mixed, especially as the People’s Bank of China (PBoC) and Politburo meetings indicate a focus shift towards local debt resolution instead of a direct consumption stimulus.

Analysts note that the “3D Journey” of debt, demographics, and deflation remains turbulent, especially with underwhelming consumption stimulus measures.

Uncertainty in the e-commerce sector is likely to continue over the next 1-2 years. Although consumer sentiment may take time to recover, initiatives like the trade-in program for home appliances, launched in September and October, show some resilience in the market.

“Given low visibility around the pace of consumption recovery in 2025 and 2026, we believe a Bull-Bear Framework could help investors navigate potential opportunities in the sector,” said analysts led by Eddy Wang in a note.

Bull-Case Scenario

In the Bull-case scenario, Morgan Stanley forecasts that China’s e-commerce sector could expand by 14% YoY in 2025 and 13% YoY in 2026, assuming more aggressive government consumption-related stimulus, including an extended trade-in policy. Under this favorable condition, the firm ranks PDD Holdings Inc DRC (NASDAQ:PDD) as the top choice, given its stronger GMV (Gross Merchandise Volume) growth and market share gains. JD (NASDAQ:JD) and Alibaba (NYSE:BABA) are also expected to prosper.

Bear-Case Scenario

In the conservative bear case, the e-commerce sector is expected to grow merely 5% YoY in 2025 and 4% YoY in 2026, presuming weakened consumption without additional stimulus. The intense competition among e-commerce players would likely depress margins. PDD remains Morgan Stanley analysts’ top recommendation in this scenario since its 'value-for-money' positioning would be more resilient in weak consumption conditions.

Key Indicators

Morgan Stanley advises investors to monitor three key indicators to assess the performance of China’s e-commerce sector:
1. Salary growth and unemployment rates
2. Home prices
3. Government policy support

In its base-case scenario, the firm anticipates that the Chinese government will provide fiscal stimulus amounting to Rmb 2 trillion in 2024 and Rmb 2-3 trillion in 2025, leading to nominal GDP growth of 3.9% in 2025 and 4.1% in 2026.

E-commerce sales are projected to decelerate to 9% in 2025 and 7% in 2026, as consumer sentiment experiences modest improvement amidst fierce competition. In this outlook, Morgan Stanley prefers PDD followed by JD, and then Alibaba.