Emerging markets are getting attention. Morgan Stanley names the 'highest quality' stocks to play it

Published Wed, Feb 8 20237:30 PM EST

Emerging market stocks are piquing investor interest. "We expect that increased consumer spending and outbound travel [from Mainland China] will benefit many EMs, particularly in Asia, Africa, and Latin America," Fitch Solutions wrote in a report on Jan. 31. And Christian Nolting, global chief investment officer at Deutsche Bank , told CNBC's " Squawk Box Asia " on Tuesday that Asia will likely outperform its peers where emerging markets are concerned, and that China's reopening will be the "key driver" for Asian asset classes. Against that backdrop, Morgan Stanley named a raft of EM stocks it says are of the "highest quality" and are trading at reasonable prices. The investment bank uses what it calls a "Best Business Models" approach, which it says has beaten the MSCI World Index by more than 400 basis points since its inception. The approach combines quantitative analysis with bottom-up analysis from its research and sustainability teams to score companies against their peers. "We believe this approach is suitable for a buy-and-hold strategy for the medium-to-long-term horizon," Morgan Stanley's analysts, led by Jonathan Garner, wrote in a note on Feb. 2. Morgan Stanley said valuations look "attractive" for the 29 stocks that turned up on its screen. Stocks on the screen It should come as no surprise that several stocks from China — widely seen as the world's largest emerging market — turned up on the screen. One such stock is tech giant Alibaba . Morgan Stanley likes Alibaba as a play on China's reopening and consumption recovery. The company's strong cashflow generation and continued share buyback could also support its share price, according to the bank. Alibaba is Morgan Stanley's top pick in the Chinese tech sector. And when it comes to China's internet sector, Morgan Stanley likes Tencent for its dominant position in China's online consumer market and multiple drivers of positive earnings. The bank is a fan of China's largest lithium producer, Ganfeng Lithium . It said it expects Ganfeng will be able to better capture profits across the lithium value chain, given its relative insulation from the lithium industry's price movements. Warren Buffett-backed Taiwan Semiconductor Manufacturing Company is another of the bank's top picks. The chipmaker is a "key player" in the global tech supply chain, according to Morgan Stanley, which said TSMC's "strong execution" will allow it to secure and even gain market share in the leading-edge foundry market. South Korean chip maker Samsung Electronics is another semiconductor stock that made the bank's list. "We view our overweight call as more defensible on costs, balance sheet strength, and the ability to weather a severe downturn better," the bank said. Polish retail chain Dino Polska is also a top pick. Morgan Stanley said it believes the company will be able to support "significant growth" by doubling its store footprint, with the bank forecasting earnings before interest, taxes, depreciation and amortization to grow at a compounded 24% into 2025. Morgan Stanley also likes South Korean automaker Kia Corp for its "differentiated strategy" in electric vehicles, as well as mining firm Rio Tinto for its "best-in-class" balance sheet and because it's a beneficiary of "higher-than-historical" iron ore prices. Singapore-based utilities firm Sembcorp Industries is another Morgan Stanley favorite. The bank said the quality of Sembcorp's returns should become "more sustainable" and "less volatile" as the company expands its renewables portfolio and inks longer-term power supply agreements for its conventional energy portfolio. Walmart de Mexico , the Mexican and Central American arm of U.S. grocery giant Walmart , is another top pick. "We are bullish on Walmex's omni-channel opportunity, as the company continues to develop and deploy new initiatives on this front," the bank said. "With its omni-channel capabilities (furthered by Walmart links) and with longstanding online grocery experience, we believe Walmex's eCommerce business can grow from less than 2% of sales in 2019 to about 7% in 2024, with growth and profitability in balance," the bank said. — CNBC's Michael Bloom contributed to this report.