Morgan Stanley upgrades China property to ‘attractive’ despite default fears

xizhimen · Oct 13, 2021

Morgan Stanley upgrades China property to ‘attractive’ despite default fears

PUBLISHED TUE, OCT 12 20218:59 PM EDT

KEY POINTS

“We believe the default risks and property market weakness have been largely priced into property stocks,” said Elly Chen, equity analyst at Morgan Stanley in a note.
China’s property developers have grown rapidly following years of excessive debt, prompting authorities to roll out the “three red lines” policy last year.
The world’s most-indebted developer, Evergrande, warned twice last month it could default. Ratings agencies have also downgraded other Chinese property developers on tight liquidity and default risks.

Morgan Stanley has upgraded China’s property sector to “attractive,” even as worried investors are watching closely to see if debt-saddled Evergrande might default, and whether there will be contagion.
The U.S. investment bank said it believes that policy easing of the property sector looks likely to kick in, which will support Chinese real estate stocks.

“We believe the default risks and property market weakness have been largely priced into property stocks,” Elly Chen, equity analyst at the bank, said in a note dated Oct. 10. “Property stocks will react on policy easing, which looks more likely now.”

Property stocks are pricing in part of these risks, and we think systemic risk is manageable.
Elly Chen
EQUITY ANALYST, MORGAN STANLE

Morgan Stanley’s top picks

Morgan Stanley has upgraded the China property sector to “attractive” in view of attractive valuation and more potential supportive measures aimed at boosting the real estate sector.
It says it prefers companies with strong earnings visibility, strong execution track records, and “robust” balance sheets.