South Korea, Brazil Stock Ratings Raised at Morgan Stanley

South Korea and Brazil stocks were raised to “overweight” at Morgan Stanley, which said valuations have improved after a drop in developing-nation equities over the past five weeks.

“Whilst our top-down view remains somewhat cautious, it is important to note that risk/return has improved with the move to lower valuations,” analysts led by Jonathan Garner, Morgan Stanley’s chief Asian and emerging-market strategist, wrote in a report. The two countries join China, Russia and Malaysia among the brokerage’s top recommendations within developed nations.

South Korea’s Kospi index is valued at 10.5 times estimated profits, compared with a multiple of 10.2 times for Brazil’s Bovespa Index and MSCI Emerging Markets Index’s 11.2 times, according to data compiled by Bloomberg. The index of developing markets has dropped 0.7 percent this year, compared with a 4.1 percent gain on the MSCI World Index.

MSCI’s index of emerging markets rose 0.8 percent to 1,142.07 as of 12:48 p.m. in Singapore. The measure is set for its first weekly advance since the period ended April 22.

South Korea’s Kospi Index (KOSPI) has slumped as much as 8.7 percent from its record high set on May 2, a “good opportunity” for investors to increase their holdings in the nation, according to Morgan Stanley. The brokerage joins Credit Suisse Group AG and Citigroup Inc. in recommending shares of the Asian nation amid improving earnings and more attractive valuations.
Earnings Upgrades

South Korea saw the strongest upgrades of earnings estimates within the region in May, Credit Suisse analysts led by Sakthi Siva wrote in a report dated May 25, advising investors to buy the nation’s equities on “dips.” The Kospi may rise to 2,350 by the end of the year, Citigroup analysts led by Michael Chung said in a report.

Brazil’s benchmark equity gauge has fallen 11 percent from this year’s peak amid concern quickening inflation will hurt economic growth. The upgrade of Brazil was mainly driven by gains in earnings growth and an increase in analysts’ profit estimates, Morgan Stanley said in the report.

Petroleo Brasileiro SA (PETR4), Brazil’s state-controlled oil company, reported this month first-quarter profit of 10.99 billion reais ($6.8 billion), beating analysts’ estimates, according to a regulatory filing.

Morgan Stanley cut Indonesia shares to “underweight” from “equal-weight,” saying investors aren’t “pricing in” the potential risks from an acceleration in inflation. The brokerage lowered the Czech Republic to “equal-weight” from “overweight,” citing a deterioration in its earnings outlook and valuations, according to the report.