Morgan Stanley's A-share sentiment indicator has rebounded sharply, breaking above the 22% excessive pessimism technical threshold for the first time in over a month. The firm believes that after the October correction, risk-reward at the individual stock level has improved notably, and recommends that investors selectively position in high-quality oversold names.

According to a research report released on November 5 by Morgan Stanley's Laura Wang team, as of November 4, the Morgan Stanley A-Share Sentiment Index (MSASI) surged 18 percentage points from the previous reading on October 28 to 31%, marking the first time in over a month that it has risen above the 22% excessive pessimism threshold.

The report noted that once this indicator falls below the 22% technical rebound threshold, history suggests a potential market rebound tends to occur within one to two months, and this time the indicator had remained below that threshold for approximately one month.

Morgan Stanley believes the rapid October correction has created more attractive valuations and buying opportunities for certain fundamentally sound stocks that were excessively sold off. The current recommendation is to focus on carefully selected high-quality oversold stocks. On the whole, A-shares remain more favored relative to Hong Kong stocks.

How the Morgan Stanley A-Share Sentiment Index Measures A-Share Sentiment

The Morgan Stanley A-Share Sentiment Index (MSASI) is composed of 12 indicators covering dimensions such as trading volume, leverage, technical momentum, derivatives, fund flows, and earnings expectations. These include ChiNext turnover, A-share turnover, stock index futures turnover, northbound turnover, margin trading balance, new accounts at the Shanghai Stock Exchange, the 30-day RSI of the CSI 300, the number of A-shares hitting the daily limit up, CSI 300 futures discount, CSI 300 call-put ratio, foreign passive fund flows into the CSI 300, and the breadth of earnings forecast revisions.

Morgan Stanley standardizes each indicator using a 100-day moving maximum-minimum method, then assigns weights based on their historical explanatory power relative to the CSI 300 Index, ultimately forming a weighted sentiment indicator ranging from 0 to 100. A one-month moving average is used to smooth short-term fluctuations.

Therefore, the Morgan Stanley A-Share Sentiment Index breaking above 22% is more akin to a sentiment and technical repair signal.

Trading Data Improves, Multiple Trading Indicators Recover in Tandem

The research report pointed out that from the perspective of various market activity indicators, overall market trading became more active during this period.

ChiNext average daily turnover rose 6% month-on-month to RMB 469 billion.

Overall A-share average daily turnover increased 7% to RMB 1,753 billion.

Stock index futures turnover grew 16% to RMB 544 billion.

The 30-day Relative Strength Index (RSI) also rose 11 percentage points from the previous statistical period.

Notably, the margin trading balance fell 4% from the prior period to RMB 2,296 billion, indicating that leveraged funds are still in the process of deleveraging.

Meanwhile, the breadth of earnings forecast revisions remained negative and deteriorated further compared to the previous week, reflecting that analysts' expectations for corporate fundamentals have not yet shown substantive improvement.

On the southbound capital front, net inflows during the period from October 29 to November 4 totaled approximately USD 2 billion, with monthly cumulative inflows maintained at USD 2 billion and year-to-date net inflows reaching USD 54 billion, equivalent to 34% of the same period last year.

Liquidity Support Strengthens Significantly, Policy Tools Still Have Room

Morgan Stanley attributed part of the sentiment rebound to increased market stabilization efforts.

The firm stated that broad-based A-share ETFs it tracks saw net inflows of RMB 201 billion within a week, indicating significant liquidity support for the market. On November 4, the STAR 50 Index and ChiNext Index rose 10.0% and 6.4%, respectively.

The report also mentioned that policymakers have stepped up efforts to promote the use of capital market support tools. Morgan Stanley estimates that of the RMB 800 billion in related quotas, at least RMB 550 billion, or approximately 70%, remains available.

This means short-term downside support for the market has strengthened somewhat. However, Morgan Stanley did not interpret the recent rebound as a signal to aggressively turn bullish, instead emphasizing that stabilization measures and valuation repairs have improved the risk-reward for certain stocks.

Strategy View: Short-Term Volatility Persists, Favor Oversold Quality Stocks

Morgan Stanley believes the sharp October sell-off has created more attractive valuations and entry points for a considerable number of companies with solid fundamentals, resilient earnings, healthy balance sheets, and sustainable shareholder returns. The team simultaneously published "China Equity Strategy: 10 Oversold Stocks Worth Watching" (November 4, 2026) as a reference for action.

In terms of market preference, Morgan Stanley continues to favor A-shares over Hong Kong stocks, advocating selective positioning in high-quality oversold individual stocks rather than pursuing broad index exposure. The firm also believes that the U.S. midterm election results provide a more balanced opportunity for sector and individual stock portfolio construction in Chinese equities, potentially attracting foreign capital to revisit entry timing.

The report emphasized that the correct strategy at present is to use the window of strengthened market support and individual stock valuation repair to selectively build positions before waiting for all uncertainties to dissipate.