Sell Russian Equities as Growth Slows, Buy China, JPMorgan Says

By Michael Patterson

July 29 (Bloomberg) -- Emerging-market stock investors should sell holdings in Russia and Brazil and buy Chinese shares as the global economic slump reduces profits at energy companies and cools inflation in China, JPMorgan Chase & Co. said.

Russian equities were cut to ``underweight'' from ``neutral'' today by JPMorgan strategists including Adrian Mowat, who cited slowing demand for commodities and the risk of ``unconventional'' government policies to stem price increases. Russia's Micex Index has declined 24 percent this year and plunged 5.5 percent on July 25 after Prime Minister Vladimir Putin called for an investigation of prices charged by steelmaker OAO Mechel.

Investors should pare holdings of Brazilian energy producers including Petroleo Brasileiro SA because higher interest rates may slow economic and profit growth next year, Mowat wrote in a note to clients. Chinese lenders such as Industrial & Commercial Bank of China Ltd. may rally because inflation peaked in February and valuations fell relative to other emerging markets, he said.

``Investors' conviction in their large overweight in commodity and energy stocks is low; these sectors are likely to be a source of cash,'' wrote Hong Kong-based Mowat, JPMorgan's chief Asian and emerging-market strategist. ``Lower Chinese inflation will drag investors into this market.''

China Shares Slump

The MSCI Emerging Markets Index tumbled 19 percent this year as rising commodity prices prompted central banks to raise interest rates even as $474 billion of credit losses and asset writedowns slowed global growth. China's CSI 300 Index sank 46 percent this year, the worst performance among benchmarks in the world's 20 biggest markets, according to Bloomberg data. The Bovespa index in Brazil dropped 11 percent in 2008 and fell into a bear market for the second time in two years last week.

Mowat also raised Turkey's equities to ``overweight'' today, saying political uncertainty will ease and shares are ``remarkably cheap'' after a 32 percent decline in the benchmark ISE National 100 Index this year.

An ``overweight'' recommendation means investors should hold a greater proportion of the shares than is represented in benchmark indexes, while ``underweight'' means they should own fewer.

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.