Bloomberg News

Morgan Stanley Cuts ‘Overbought’ Emerging Stocks After Rally

February 12, 2012

(Adds inflows data from Citigroup in fourth paragraph.)

Feb. 10 (Bloomberg) -- Emerging-market stocks are “overbought” as investors pour money into developing-nation equity funds, prompting Morgan Stanley to cut its allocation for developing-nation equities, the brokerage said in a report.

Morgan Stanley reduced its weighting on emerging and Asian stocks from the maximum “overweight’ and boosted cash holdings to 2 percent from zero, analysts Jonathan Garner and Pankaj Mataney wrote in the report dated today.

The MSCI Emerging-Markets Index posted its best start to a year since 2001 in January after European countries agreed to tighter budget controls and as policy makers from Brazil to the Philippines cut borrowing costs to spur economic growth. Developing-nation equity funds lured the most inflows since October 2010 in the week ended Feb. 8, taking in $5.8 billion, Citigroup Inc. analysts led by Markus Rosgen wrote today.

‘‘Strong inflows are a near-term contrarian negative,’’ Garner and Mataney wrote. ‘‘The market is technically overbought.’’

Emerging funds have seen inflows every week this year, with net purchases of $17 billion, or 3 percent of assets under management, Kelly Kwok, one of the Citigroup analysts cited in the report, wrote in an e-mail. Buying of exchange-traded funds accounted for 70 percent of the purchases, according to the report, which cited its own data and fund researcher EPFR Global.

China Trade

The emerging-markets index dropped 0.8 percent to 1,053.23 at 1:09 p.m. Singapore time, paring a sixth consecutive weekly advance, after China’s customs bureau said exports fell and imports dropped more than forecast in January, the first declines in two years.

The Chinese trade figures follow the release yesterday of unexpectedly high January inflation data, which gave investors ‘‘temporary pause for thought,’’ the Morgan Stanley report said.

‘‘There is now only 14 percent upside left to our end-2012 target price of 1,210’’ for the MSCI gauge, Garner and Mataney said. ‘‘We start to scale back our equities weighting into strength.’’

Still, attractive valuations and ‘‘ample liquidity’’ will push the emerging-stocks rally further, Citigroup equity strategist Geoffrey Dennis said in a Feb. 8 report. He forecast the MSCI Emerging Markets Index will rise to 1,225 this year.

China Inflation

China’s consumer prices rose 4.5 percent from a year earlier, the National Bureau of Statistics said on its website yesterday. That was more than all 33 forecasts in a Bloomberg News survey of economists and a median of 4 percent. That may limit room for monetary easing as Europe’s debt crisis damps exports.

Concerns about the outlook for China’s economy, the world’s second-biggest, have increased after the International Monetary Fund warned this week that economic expansion would be cut almost in half if Europe’s debt crisis worsens and after the jump in Chinese inflation.

Emerging-market stocks also dropped today after European finance ministers held back a rescue package for Greece that increased pressure on the nation’s parliament to endorse the government’s a newly minted austerity plan or exit the euro.

--Editors: Matthew Oakley, Allen Wan

To contact the reporter on this story: Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net


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