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Morgan Stanley Sees ‘Value’ in Emerging-Market Stocks (Update1)
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May 20 (Bloomberg) -- Emerging-market and Asian shares are offering “significant value” after Europe’s sovereign-debt crisis prompted a selloff, Morgan Stanley said.

The MSCI Emerging Markets Index’s forward price-earnings ratio is 15 percent below the “long-run” average, Jonathan Garner, Morgan Stanley’s chief Asian and emerging-market strategist, wrote in a report yesterday. He upgraded Turkish shares to “equal-weight” from “underweight” and downgraded Malaysia and Thailand to “equal-weight” from “overweight.”

The MSCI gauge has dropped 13 percent from this year’s high set on April 15 on concern austerity measures from debt-laden European nations such as Greece will hurt the global economic recovery. The index is valued at about 11.5 times estimated earnings, compared with a high of as much as 16.7 times in December, according to data tracked by Bloomberg.

“The travails of the Eurozone have led to significant value reappearing in Asian and emerging-market equities,” Garner wrote. “The second half will be characterized by a resumption in the bull trend in Asia and emerging markets and, in particular, by a stronger performance from Chinese equities.”

He initiated coverage of Colombia with an “equal-weight” recommendation.

Chinese stocks are the world’s fourth-worst performers this year, with the Shanghai Composite Index having dropped 21 percent as the People’s Bank of China raised lenders’ reserve requirements three times and the government stepped up curbs on property speculation. The MSCI China Index, tracking mostly Hong Kong-traded stocks, has lost 11 percent.

‘Evident’ Value

“Value is evident, in our view, in both China A shares and MSCI China as the pressure of the tightening measures and concerns over inflation caused a de-rating of the P/E multiple,” Garner wrote. He maintained his “overweight” rating on Chinese shares, citing expectations of “a soft landing in the economy in the second half.”

China can wait until the second half of 2010 or next year to raise interest rates as the nation’s economic growth is expected to slow, the Beijing-based China Securities Journal said today in an editorial on its front page. Economic growth may slow to 10 percent in the second quarter, 9 percent in the third and 8 percent in the fourth, the newspaper said, citing unidentified economists.

Less Attractive

Malaysian shares are less attractive, based on both the dividend yield and historical price-to-earnings multiple, Morgan Stanley said. The benchmark FTSE Bursa Malaysia KLCI Index has gained 2.5 percent this year, compared with the 7.9 percent decline in MSCI’s index of 22 developing nations.

Thai shares were downgraded because of their valuations and the highest political risk ranking within the brokerage’s emerging-market model, as clashes between anti-government protestors and troops escalated over the past six weeks, according to the report. Even after a forced surrender of the demonstrators yesterday, mobs continued to burn banks, shopping malls and the stock exchange.

To contact the reporter on this story: Shiyin Chen in Singapore at [e-mail]

Last Updated: May 19, 2010 22:16 EDT
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