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Morgan Stanley Joins China Bulls

Wednesday, 9 Jan 2013 | 12:00 AM ET
Ian McKinnell | Photographer's Choice | Getty Images

Morgan Stanley echoed Goldman Sachs's buy call on Chinese stocks on Tuesday, citing China's improved growth outlook compared to other regions.

"European stocks exposed to emerging markets and China generally underperformed last year," wrote Morgan Stanley strategist Graham Secker in an equity strategy report.

"We think this should reverse as the Chinese growth outlook appears to be improving at the same time as Europe remains weak and the U.S. suffers from policy uncertainty."

The Chinese economy is forecast to have grown 7.8 percent in the fourth quarter, according to a poll by Reuters, representing a modest increase on the third quarter's 7.4 percent rise.

Meanwhile, China's official Purchasing Managers' Index (PMI), which tracks larger state-owned corporations, remained at a 7-month high of 50.6 in December, while the HSBC PMI, a private survey of smaller factories, rose to 51.5 from 50.5 in November.

China's upturn has come on the back of a slew of stimulus measures implemented since the end of November 2011, including two interest rate cuts and three reductions in lenders' reserve requirement ratios.

Morgan Stanley's overweight stance on China echoes recent buy calls by other investment banks, including Goldman Sachs and Nomura.

On Monday, Goldman Sachs Chief Equity Strategist Helen Zhu forecast the MSCI China Index will end 2013 8 percent up on current levels. The index gained 3.2 percent last year, reversing a 22 percent loss in 2011.

"Faster reform progress is the key upside risk," Zhu wrote in a note. "We see better returns heading into the second quarter, on a pickup in exports and a kick off of reforms."

(Read More: Goldman on China Stocks: Why We'll Be Right This Time)

Also on Monday, Nomura published a report in which it advocated exposure to Chinese banks stocks, which it said would benefit from modest inflation and loose monetary policy in the near term. Nomura is overweight on China's financial stocks and has as its top picks China Construction Bank, Agricultural Bank of China and Chongqing Rural Commercial Bank.

(Read More: Why it's Time to Buy China Bank Stocks)

Meanwhile, Marc Faber told CNBC on Tuesday that investors should look to buy stocks in countries whose indexes underperformed in 2012, including China, Vietnam, Japan and the Ukraine.

Nonetheless, global political think tank Eurasia Group flagged up a medley of concerns regarding China in its 2013 annual risks report.

"Take a serious look at China and the risks come faster than you can process: labor scarcity, pensions, inefficiency of state owned enterprises, conflicts in the East and South China Seas, clean water availability, clean air, food and commodity scarcity," wrote Eurasia President Ian Bremmer and Head of Research David Gordon in the report.

(Read More: Relax on Europe, Beware Emerging Markets)

-By CNBC's Katy Barnato

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