Morgan Stanley says HK financial fears overdone, reiterates Overweight on 4 stocks

Morgan Stanley said recent market concerns over Hong Kong's financial sector are overdone, reiterating Overweight ratings on AIA Group, HSBC Holdings, Standard Chartered and Hong Kong Exchanges & Clearing.

The newly introduced State Council regulations on overseas investment and the CSRC's rectification of cross-border stock trading aim to establish a rule-of-law framework for outbound direct investment, not target residents' normal overseas financial needs, Morgan Stanley said in a report. The measures are designed to channel funds into compliant official channels such as Stock Connect, QDII and the Cross-boundary Wealth Management Connect. Mainland residents may still open investment accounts or purchase insurance in person in Hong Kong as usual, the firm said. They are only unable to directly operate core online overseas investment and trading functions within mainland China, a standard consistent with the compliant management framework long implemented for insurance business.

AIA's share price has corrected about 13% on excessive market concerns that cross-border insurance business from mainland visitors would be disrupted. Insurance regulators in both regions, including the Hong Kong Insurance Authority, have reiterated that as long as the entire sales and policy signing process is completed in person by customers in Hong Kong, such business remains compliant and operates as usual. Even under an extreme and unlikely scenario of no new mainland visitor business starting from the second half of 2026, the impact on AIA's embedded value or operating profit would be within a manageable 2% to 6% range, Morgan Stanley estimated. The firm described AIA's current valuation as highly attractive.

HSBC and Standard Chartered operate under highly compliant regulatory guidelines and are minimally affected by the crackdown on unlicensed gray-channel securities activities or illegal cross-border securities account openings, the firm said. The opening of general overseas deposit and savings accounts by mainland residents is not a target of this regulatory rectification. Morgan Stanley said it previously adopted relatively conservative assumptions on wealth management and capital inflows for both banks, and their current valuations do not fully reflect their solid return potential. Their share prices have also overshot on the downside, the firm said.

For HKEX, the core regulatory objective is to eliminate unlicensed gray-market offshore brokers while actively channeling mainland funds into official and legitimate channels. As formal cross-border capital connectivity schemes such as Stock Connect continue to expand, Hong Kong's role as a core hub for attracting China-related wealth creation and facilitating legitimate capital account flows remains unchanged, Morgan Stanley said. HKEX will be a long-term major beneficiary of the expansion of official channels, the firm said.

The reaffirmation of Overweight ratings across all four names provides institutional support for investors who were concerned about regulatory disruption to the Hong Kong financial sector. The selloff in recent sessions had wiped billions from the market value of these stocks. The next catalyst will be the implementation details of the new State Council regulations, which will clarify the scope of compliant cross-border activities for mainland residents.

This article is for informational purposes only and does not constitute investment advice.