Morgan Stanley says buy China equities

SINGAPORE - Morgan Stanley recommended "cheap" stocks in South Korea and China and advised reducing holdings in Southeast Asia after rallies drove indexes in Indonesia, the Philippines and Malaysia to record highs.

"South Korea and China are examples of markets that are not in any way expensive," Jonathan Garner, Morgan Stanley's Hong Kong-based chief Asian and emerging-market strategist, said in an interview in Singapore on Tuesday. "We don't find it difficult to find large-cap Chinese stocks which are attractive and we are quite happy to recommend."

China's low earnings volatility and "relatively contained" inflation make it more "attractive", Garner said. Oil driller CNOOC Ltd and coal producer China Shenhua Energy Co are on the brokerage's focus list of companies. In contrast, high earnings growth expectations are embedded in valuations for some Southeast Asian markets, leaving them "no margin of error" for unexpected interest rate increases, he said.

The Shanghai Composite Index has climbed 33 percent from its July 5 low as fund flows to emerging markets surged. Stocks in the gauge are valued at 17.7 times estimated earnings, less than half the multiple of 43 when the market peaked in 2007. South Korea's Kospi Index has risen 16 percent this year, adding to last year's 50 percent jump. The gauge is at 11 times estimated earnings, the lowest in Asia after Pakistan and Vietnam.

In Southeast Asia, benchmark indexes in Indonesia, the Philippines and Malaysia are among Asia's best performers this year.

The MSCI Emerging Markets Index has surged 16 percent this year, more than twice the 7.4 percent gain in the MSCI World Index of shares in developed markets.

China's stock market may benefit from quantitative easing as excess liquidity flows into equities, Michael Kurtz, head of Asian strategy at Macquarie Bank Ltd, said in an interview with Bloomberg Television on Wednesday.

While the US government's debt-buying plan "creates challenges for China", some of this liquidity may be diverted to the A-share market, he said.

"What matters significantly more for emerging markets equities are their own valuations, their earnings growth and the policy environment in the emerging world itself," Garner said on Tuesday.

Bloomberg News