The Business Times | MARCH 27, 2013
Report gives low profitability and weak technicals as reasons for rating
Morgan Stanley downgraded the regional real estate sector from "overweight" to "equal-weight" in its latest report.
Citing the sector's low profitability and weak technicals, the report on Monday said: "Although still having cheap valuation, its current trailing return on equity is the second worst among all the 24 industry groups."
"Real estate also ranks badly in terms of technical indicators like price momentum and fund flow... We observe relatively crowded fund flow going into the real estate industry recently... which is one of the drags on real estate to equal-weight from previous overweight," the report added.
In Singapore, the real estate sector is no exception, with Morgan Stanley analysts being "more conservative" on the local sector.
Chinese real estate, on the other hand, appears to be bucking the trend for now, with the research arm's analysts having a "relatively bullish view" on it, given that the sector has the highest trailing return on equity and lowest trailing price-to-equity ratio among the major countries in the region.
Also falling from favour was the telecoms sector, which was downgraded a notch from "equal-weight" to "underweight" in the report. On an overall basis, the sector fared even worse than real estate, ranked 20th out of 24 industry groups compared with the latter's final rank of eighth place.
"The (telecoms) industry is still facing negative earnings revision, together with weakening price momentum and relatively crowded fund flows," the report said.
Even so, the software and services sector fell back into the good graces of the analysts, earning an upgrade from an "equal-weight" to "overweight" rating.
Now in fourth place, the industry has exhibited "very positive consensus earnings revision recently", the report said.
Even so, Morgan Stanley analysts noted that the sector's Achilles heel lies in its expensive valuation, which is ranked 23rd in terms of trailing price-to-book ratio.
Another sector being lifted to "equal-weight" from "underweight", the food and staples retailing industry, was boosted to its improved rating by Australia, which carries a weight of 50 per cent in the industry.
"We see meaningful improvements in food (and) staples retailing's ranking on technical indictors - strong price momentum and uncrowded fund flow as percentage of assets under management," the report said.
The banking sector, which retained its "overweight" rating, also held pole position among the 24 industry groups under analysis. The report noted that the industry was characterised by cheap valuations, positive earnings revisions and an uncrowded fund inflow.
Among Morgan Stanley's overweight-rated stocks which were also in overweight sectors, the banking sector also dominated, accounting for 12 of the 33 stocks, with counters such as the Agricultural Bank of China Ltd, BOC Hong Kong, China Construction Bank Corp and Chinatrust Financial Holding making the cut.
While Chinese counters featured heavily in the overweight banking sector, it was Indian stocks which shone overall, representing 10 of the 33 overweight stocks. The bulk of them were energy counters such as Bharat Petroleum Corp, Cairn India Ltd and Hindustan Petroleum.
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