Morgan Stanley Puts More Cash Into Emerging Stocks on China Cut

Morgan Stanley is putting more money into emerging-market stocks after China cut borrowing costs for the first time since 2008.

The U.S. bank will reduce cash to zero from a 2 percent weighting it has had since February and hold a 10 percent overweight allocation in equities, according to a report today from Jonathan Garner, chief equity strategist for Asian and Emerging Markets. China reduced borrowing costs and loosened controls on banks’ lending and deposit rates, the People’s Bank of China said yesterday.

“We are moving back today to a fully invested stance in our EM asset allocation model,” Garner said. China’s “interest-rate cut yesterday is likely a significant positive catalyst for emerging equities.”

The MSCI Emerging Markets Index has fallen 16 percent from this year’s peak on March 2 and was down 0.5 percent to 908.56 at 11:35 a.m. in Shanghai. Developing-nation equities have dropped on concern China’s economic slowdown is deepening and Europe’s debt crisis will curb exports from the Asian region.

Chinese data this weekend is expected to show fixed-asset investment probably expanded at the slowest pace in a decade in May, inflation matched a two-year low and industrial output grew less than 10 percent for a second month, according to Bloomberg economist surveys.

“Investors are quite concerned the data tomorrow may be very bad,” said Zhang Yanbin, an analyst with Zheshang Securities Co. in Shanghai.

Shares in the emerging-markets gauge have fallen 0.9 percent this year, dragging down estimated earnings to a multiple of 9.8, cheaper than the 11.7 multiple for shares on the MSCI World Index.

China Rates

The developing-nations gauge recently traded below the brokerage’s “bear case fair value” of 900, according to the report. Morgan Stanley had boosted its cash weight in February after a market rally “had run too far too fast,” Garner said. The gauge jumped 14 percent in the first quarter, the strongest start in 20 years.

China’s benchmark one-year lending rate will drop to 6.31 percent from 6.56 percent effective today, the People’s Bank of China said on its website yesterday. The one-year deposit rate will fall to 3.25 percent from 3.5 percent.

The Chinese central bank last reduced rates in late 2008, when the government unveiled a 4 trillion yuan ($586 billion) stimulus package to counter the effects of the global financial crisis. Interest rates have been unchanged since an increase in July 2011.

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