Russian Stocks Should Be Bought, Morgan Stanley Says

By Adam Haigh and William Mauldin

Aug. 15 (Bloomberg) -- Investors should add to holdings of Russian stocks as they trade at a significant ``discount,'' and buy Israeli shares because of an ``improved'' earnings outlook, Morgan Stanley said.

Clients should increase their holdings of Russian equities even as the country risks U.S. sanctions and falling commodity prices, Morgan Stanley's head of global emerging markets strategy Jonathan Garner wrote in a note to investors.

Israel was upgraded to ``overweight'' from ``equal-weight'' on higher expectations for earnings growth and ``improved'' political risk after Prime Minister Ehud Olmert last month said he will resign, according to the note dated yesterday. Investors should also add to holdings of Taiwanese stocks.

``The earnings outlook in Russia remains very positive,'' Garner wrote. ``The primary risk at the moment in our opinion lies with possible economic and financial sanctions by the U.S. should Russian troops deploy further in Georgia.''

The brokerage said it was increasing its ``overweight'' on Russia, a position which means it advises investors hold a higher proportion of the stocks than are represented in benchmarks.

The MSCI Russia Index currently trades at a 33 percent discount to the MSCI Emerging Markets Index based on the price of its constituent stocks compared with their estimated earnings, Garner wrote. It's the highest discount Russian stocks have had since the Kremlin's tax claims against OAO Yukos Oil Co. in 2004.

Cathay Financial

U.S. Secretary of State Condoleezza Rice today travels to Tbilisi to lend support to U.S. ally Georgia after a military conflict with Russia began a week ago.

Yukos Oil was declared bankrupt Aug. 1, 2006 after the government had claimed more than $30 billion in back taxes. The company's founder, Mikhail Khodorkovsky, is serving eight years in a Siberian labor camp, while some of his company's oil assets were transferred to state-controlled OAO Rosneft.

In Taiwan, which Morgan Stanley maintains as an ``overweight,'' Garner recommended Cathay Financial Holding Co., the territory's biggest financial-services company by market value, as investment and travel restrictions with mainland China are being ``eased rapidly.''

Morgan Stanley, the second biggest U.S. securities firm, also downgraded Turkish and Indian stocks to ``underweight'' from ``equal-weight'' after a one-month rally.

India, Turkey

``India and Turkey's downgrades follow more than 24 percent outperformance since last month,'' Garner wrote. ``This has led to a reversal of their technically oversold position and a deterioration in valuation rankings.''

Hungarian and Egyptian equities were raised to ``equal- weight'' from ``underweight.'' Garner said valuations in Egypt were ``more appealing'' and Hungarian stocks were ``cheap'' due to recent underperformance. Hungary's benchmark BUX Index trades at 8.01 times earnings, compared with price-to-earnings ratio of 15.7 on the MSCI World Index.

Korean stocks were cut to ``equal-weight'' from ``overweight,'' citing a ``major deterioration'' in earnings outlook.

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To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net.