Morgan Stanley recommended in-vestors buy banks such as China-trust Financial Holding Co (中信金控) and France's Credit Agricole SA over Hong Kong lenders.
Shares of Hong Kong lenders BOC (Hong Kong) Holdings Ltd and Hang Seng Bank Ltd were "overpriced," Morgan Stanley said in its daily note to clients. The broker also recommended investors hold shares of South Korea's Kookmin Bank, Paris-based Societe Generale and Switzerland's UBS AG.
Morgan Stanley joins ABN Amro Asia Ltd, which this month advised investors switch to so-called defensive stocks in Taiwan such as financial-related companies. Domestic lenders are seen as beneficiaries of President Chen Shui-bian's (陳水扁) financial reforms.
Chen has reorganized the financial industry by pushing banks and insurers to cut off delinquent debtors, merge and expand into related businesses. The government set up a NT$140 billion fund to bail out bankrupt lenders and passed the Financial Holding Company Act (金融控股公司法) in 2001, allowing lenders and insurers to merge.
Last week, Merrill Lynch & Co recommended investors reduce holdings of Taiwanese stocks as protesters demanded a recount of the presidential election.
Goldman Sachs Group Inc also said last week in a research report that it would downgrade Taiwan-ese banks, including Chinatrust Financial and Mega Financial Holding Co (兆豐金控), because the country's disputed election may lead to political instability.
Hong Kong's Hang Seng Finance Index, which measures four stocks, climbed 13 percent in the past six months, amid signs of a pickup in the city's economy that would fuel loan demand.
"Growth in Hong Kong appears fully priced in," the Morgan Stanley note said. "Elsewhere, opportunities exist."
BOC trades at 17 times estimated earnings, while Hang Seng Bank shares trade at almost 19 times. Chinatrust trades at about 27 times, though its shares slid 5.7 percent since closing at a record high on Feb. 16. Credit Agricole trades at 14.5 times and Societe Generale at 11.2 times.
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