Morgan Stanley sees slow HK, China market recovery

SHANGHAI, Dec 19 (Reuters) - Morgan Stanley (MS.N) expects a long and tumultuous U-shaped bottom in China and Hong Kong stock markets as the economy continues to worsen despite government aid, its Asia strategist said on Friday.

Weakening exports and a shaky real estate market are leading to a capital spending recession that could drag economic growth down below 6 percent next year and cause companies' profits to drop, Jerry Lou told a financial conference in Shanghai. "It's the first time in a decade that I don't feel confident to see clearly the economic landscape in six month," Lou said.

"It's a virtue to be patient in buying stocks under such circumstances. China's economy is already huge and open, so recovery needs time."

The government has unveiled a 4 trillion yuan ($584 billion) economic stimulus package, cut interest rates, injected liquidity into the banking system, slashed taxes and encouraged lending to cushion a slowdown in China's economy.

However, Lou said the government could only prevent a crisis, not change the market's downtrend.

For example, the 4 trillion yuan package was far from enough to reinvigorate an economy where companies are increasingly reluctant to spend and banks are less willing to lend, he said.

The government's latest real estate policies aimed at boosting home purchases won't change peoples' expectations that property prices will fall further.

"No government has yet proved successful in rescuing the property market," Lou said. "The world's last asset bubble is now bursting."

Lou also said that low valuations may not justify investments now in Chinese stocks, where 87.6 percent of listed companies are highly cyclical. Profits at industries such as steel and banks would fall sharply during an economic downturn.