Morgan Stanley Says ‘Stick With the BRICs’ on Growth

Morgan Stanley said investors should “stick with the BRICs” and add to their holdings in China and Russia as faster economic growth will allow emerging-market stocks to catch up to developed-market gains this year.

“Stick with the BRICs,” strategists led by Jonathan Garner wrote in a report, referring to Brazil, Russia, India and China. “BRIC tends to outperform in non-recession years such as the 2003 to 2007 period, whilst it has underperformed in recession years.”

The brokerage raised its recommended “overweight” in Chinese and Russian equities relative to the MSCI Emerging Markets Index to 2.15 percent, compared with 2 percent and 1.65 percent respectively. They strategists also upgraded Thailand and Peru to “equal-weight” from “underweight” and downgraded Israel to “equal-weight” from “overweight.”

The MSCI Emerging Markets Index has gained 2.3 percent this year following the 2009 rally of 75 percent, the most since at least 1988. Indexes in the BRIC markets all rose at least 80 percent last year, ranking among the top 12 stock benchmarks tracked by Bloomberg. The MSCI World Index of developed markets has advanced 2.6 percent in 2010.

The International Monetary Fund predicted in October that the world economy may grow 3.1 percent in 2010, a forecast that the agency’s managing director Dominique Strauss-Kahn said on Jan. 14 will probably be raised later this month.

Garner, Morgan Stanley’s London-based chief Asian and emerging-market strategist, said in November that the MSCI Emerging Markets Index may rise to 1,200 by the end of 2010. The gauge slipped 0.1 percent to 1,012.86 as of 9:55 a.m. in Singapore today.

China, Russia

China’s stocks are among the worst performers within developing nations in the period between Dec. 16 and Jan. 18, with returns lagging the MSCI Emerging Markets Index by more than 4 percent in dollar terms, according to data tracked by Morgan Stanley.

The underperformance means the market is now trading at “parity” to the MSCI gauge of developing nations, compared with an average historical premium of 11 percent, according to the Morgan Stanley report.

The brokerage also raised Russia’s weighting in its recommended portfolio, citing the market’s earnings growth outlook. They also upgraded Thailand and Peru based on the outlook for profits.

Israel was downgraded by Morgan Stanley, which said that the market’s entry into MSCI’s list of developed nations, scheduled to take place in May, may weigh against share prices.

“Israel’s small weighting in the prospective MSCI World, compared with its large weighting in the MSCI Emerging Markets, may work against performance,” the strategists wrote. “This is particularly so in the current environment where emerging market flows are high, whilst inflows to global and developed markets are not as strong.”