Russia Stocks Overtakes China in Morgan Stanley Model
Russia now ranks first for earnings growth
Alexander Zemlianichenko Jr/Bloomberg
Russia's first deputy prime minister Igor Shuvalov.
Russia's first deputy prime minister Igor Shuvalov. Photographer: Alexander Zemlianichenko Jr/Bloomberg
Russia replaced China as Morgan Stanley’s top pick among the largest emerging stock markets in its developing-nation model as the brokerage advised investors to take on riskier assets.
Jonathan Garner, Morgan Stanley’s chief Asian and emerging- market strategist, last month made his first asset allocation change since June 2009, telling investors to increase their holdings of developing-nation equities and cut cash levels given the prospects of a “strong year” for the global economy. The MSCI Emerging Markets Index has retreated 4.2 percent this year, following last year’s record 75 percent rally.
“At present we are seeking beta aggressively,” London- based Garner wrote in report yesterday, referring to a measure of risk. Russia “has the highest beta,” he said.
Morgan Stanley raised its “overweight” on Russia to 220 basis points from 100 basis points, and cut its position in China to a 125 basis point “overweight” from 220 basis points. The change means Russia joins South Korea as the brokerage’s largest “risk positions,” according to the report. Russia’s overall ranking within Morgan Stanley’s country model also rose to second, lagging behind only the Czech Republic.
First Deputy Prime Minister Igor Shuvalov this week urged investors to be wary of Russian stocks as policy makers in the world’s biggest energy exporter try to prevent the economy from overheating and encourage long-term investment.
‘Very Cautious’
“I’d be very cautious about stock investments in this country,” Shuvalov said in an interview with Bloomberg Television on June 16 in Moscow. “I would welcome real investors who can build factories, something new in this country.”
Russia now ranks first for earnings growth and second on two valuation measures within Morgan Stanley’s models. Its economy is also “in somewhat of a sweet spot” with growth forecast to accelerate through the fourth quarter while economic expansion slows in Brazil, India and China, the brokerage said. The four are collectively known as the BRIC markets.
Russia’s Micex Index has declined 1 percent this year, compared with a 22 percent slump in China’s Shanghai Composite Index and a 6.4 percent retreat in the MSCI China Index. The Shanghai index fell 0.5 percent as of 11:30 a.m. local time, while the MSCI China gained 0.6 percent.
Relative to China, Russia’s historical price-to-earnings multiple is at about 0.6 times, compared with a “long-run” average of about 0.7 times, according to Morgan Stanley.
Russia’s modernization needs time, patience and long-term investments, Shuvalov said. Optimal annual growth rates shouldn’t exceed 5 percent in the next few years as the government seeks to control spending, and the central bank shouldn’t rush to let the ruble trade freely to avoid hurting domestic producers, he said.
OAO Dixy Group, Russia’s third-largest listed food retailer, and OAO Sberbank, the nation’s biggest lender, are among Morgan Stanley’s top picks, the strategist said.
Malaysia was upgraded to “overweight” from “equal- weight” while Thailand and Colombia were cut to “underweight” from “equal-weight,” according to the report.
To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net
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