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Morgan Stanley ‘Less Bullish’ on Emerging Equities

Wednesday, 01 Dec 2010 08:12 AM

Morgan Stanley said it’s less optimistic than “consensus” on emerging-market stocks in 2011, advising caution in the first half as growth slows and inflation squeezes profit margins while prompting higher interest rates.

The MSCI Emerging Markets Index will probably advance 20 percent to 1,290 by the end of 2011 from yesterday’s close, analysts including Jonathan Garner, Hong Kong-based chief Asian and emerging-market strategist, wrote in a report today. Stocks face “significant headwinds” from inflation in the first half, Garner said in an interview, predicting a better second half.

The forecast is lower than JPMorgan Chase & Co.’s end-2011 prediction of 1,500, made in a Nov. 12 report. Five days later, Geoffrey Dennis, Citigroup Inc.’s New York-based emerging market strategist, advised investors to consider adding to holdings after the gauge retreated, citing a long-term “bullish” outlook. The MSCI index rose 1.3 percent to 1,090.27 as of 4:38 p.m. in Hong Kong, having fallen 6.4 percent from its 29-month high on Nov. 5.

“There will be better moments than now to add exposure,” Garner said by phone from Hong Kong. “The base has shifted away from the impact of U.S. quantitative easing to the issue of domestic overheating in the Asia emerging-market economies.”

Concerns that mounting flows of capital will fuel inflation have grown since U.S. policy makers decided on Nov. 3 to expand asset purchases in an effort to reduce unemployment and avert deflation. MSCI’s emerging-market gauge has dropped 3.7 percent since then, while the MSCI World Index of 24 developed markets has fallen 2.8 percent.

Price Pressures

Concern that monetary tightening will hamper corporate profit growth spurred an 11 percent sell-off in China’s Shanghai Composite Index from a seven-month high on Nov. 8.

China’s manufacturing grew at a faster pace for a fourth straight month, indicating the economy can withstand higher interest rates as price pressures escalate, according to the Purchasing Managers’ Index for November. Reports today from China’s logistics federation showed input prices surging, reinforcing the case for the central bank to boost borrowing costs again after it lagged behind counterparts from Malaysia to South Korea.

Thailand unexpectedly raised its benchmark interest rate for the third time this year, signaling it views inflation as a bigger threat than slowing growth.

Asian Index Target

Morgan Stanley forecast the MSCI Asia Pacific excluding Japan Index will climb 20 percent to 540 by the end of next year from yesterday’s close, according to the report. That gauge rose 1.3 percent today to 454.70.

“We are less bullish on the outlook for Asia/emerging- market equities than consensus,” the analysts wrote, citing a “difficult absolute-returns environment until inflation and interest rates peak in mid-2011.”

Morgan Stanley reduced its rating on consumer discretionary stocks to “equal weight” from “overweight” and retained its “overweight” rating on energy stocks, according to the report.

Cairn India Ltd., the producer of crude oil from the nation’s biggest onshore field, and China Shenhua Energy Co., China’s largest coal producer, were among the energy stocks Morgan Stanley rated “overweight.”

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Morgan Stanley said it s less optimistic than consensus on emerging-market stocks in 2011, advising caution in the first half as growth slows and inflation squeezes profit margins while prompting higher interest rates. The MSCI Emerging Markets Index will probably...
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