(Bloomberg) -- China stocks were upgraded to “neutral” at Morgan Stanley, which said the growth in liquidity globally is boosting asset prices.
The brokerage also increased its “base case” target for the MSCI China Index to 50.9 from 36.3, Morgan Stanley’s Hong Kong-based strategist Jerry Lou wrote in a note today. He had cut the rating on Chinese stocks to “cautious” in April.
“A mini asset-economy upcycle, courtesy of aggressive policy-driven liquidity globally, could be developing,” Lou wrote. “Liquidity’s transference into borrowed prosperity could develop and carry the current market rally beyond 2009.”
Morgan Stanley’s 2009 forecast for the Chinese index is 6.7 percent lower than yesterday’s close. The gauge, measuring mostly Hong Kong-traded Chinese companies, has climbed 34 percent this year, helped in part by speculation that the government’s 4 trillion yuan ($586 billion) stimulus package will restore economic growth.
The so-called base case target factors in an estimated growth of 7 percent in China’s economy this year and a forecast of 4 percent earnings growth, Lou said. That values the index at about 15 times 2009 earnings, the report added.
The analyst stopped short of turning bullish on China, saying that the “mini-cycle” is unlikely to turn into a multi- year recovery as economies in the rest of the world lag behind China and as energy and commodity prices climb.
Asset Bubble?
“An asset-economy bubble, while it may look convincing, does not last because it feeds on unsustainable liquidity supply,” Lou wrote. “After the asset bubble sucks in enough risk-chasing capital and grows too expensive for the underlying economy to afford, it usually bursts.”
New lending cooled in April to 591.8 billion yuan ($86.7 billion), about a third of the record 1.89 trillion in March. Still, growth in manufacturing, urban fixed-asset investment, and retail sales have also added to speculation the world’s third-largest economy is recovering.
Goldman, Sachs & Co. said on June 1 a rally in local- currency stocks may “taper off” as investor concerns over liquidity, valuations and earnings grow.
Morgan Stanley said it’s reducing its “large” underweight position for banks in its China model portfolio by adding weightings in Bank of China Ltd., Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp.
That’s as improved liquidity helps to offset potential asset quality concerns and pressures on interest margins, Lou said. The portfolio is still holding 5 percent fewer bank stocks than indicated by the benchmark index, he added.
Morgan Stanley is also retaining its “overweight” position in telecommunications stocks and power producers, the report added.
Morgan Stanley raised China Stocks to “Neutral”
ReplyDelete3 June 2009
(Bloomberg) -- China stocks were upgraded to “neutral” at Morgan Stanley, which said the growth in liquidity globally is boosting asset prices.
The brokerage also increased its “base case” target for the MSCI China Index to 50.9 from 36.3, Morgan Stanley’s Hong Kong-based strategist Jerry Lou wrote in a note today. He had cut the rating on Chinese stocks to “cautious” in April.
“A mini asset-economy upcycle, courtesy of aggressive policy-driven liquidity globally, could be developing,” Lou wrote. “Liquidity’s transference into borrowed prosperity could develop and carry the current market rally beyond 2009.”
Morgan Stanley’s 2009 forecast for the Chinese index is 6.7 percent lower than yesterday’s close. The gauge, measuring mostly Hong Kong-traded Chinese companies, has climbed 34 percent this year, helped in part by speculation that the government’s 4 trillion yuan ($586 billion) stimulus package will restore economic growth.
The so-called base case target factors in an estimated growth of 7 percent in China’s economy this year and a forecast of 4 percent earnings growth, Lou said. That values the index at about 15 times 2009 earnings, the report added.
The analyst stopped short of turning bullish on China, saying that the “mini-cycle” is unlikely to turn into a multi- year recovery as economies in the rest of the world lag behind China and as energy and commodity prices climb.
Asset Bubble?
“An asset-economy bubble, while it may look convincing, does not last because it feeds on unsustainable liquidity supply,” Lou wrote. “After the asset bubble sucks in enough risk-chasing capital and grows too expensive for the underlying economy to afford, it usually bursts.”
New lending cooled in April to 591.8 billion yuan ($86.7 billion), about a third of the record 1.89 trillion in March. Still, growth in manufacturing, urban fixed-asset investment, and retail sales have also added to speculation the world’s third-largest economy is recovering.
Goldman, Sachs & Co. said on June 1 a rally in local- currency stocks may “taper off” as investor concerns over liquidity, valuations and earnings grow.
Morgan Stanley said it’s reducing its “large” underweight position for banks in its China model portfolio by adding weightings in Bank of China Ltd., Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp.
That’s as improved liquidity helps to offset potential asset quality concerns and pressures on interest margins, Lou said. The portfolio is still holding 5 percent fewer bank stocks than indicated by the benchmark index, he added.
Morgan Stanley is also retaining its “overweight” position in telecommunications stocks and power producers, the report added.