Asian, EMs entering the late stages of a bear market: Morgan Stanley

Asian and emerging markets are entering the late stages of a bear market, said analysts at Morgan Stanley in their mid-year equity market outlook note on Wednesday. The near-term risks, the research and broking house said, are known, but potent.

Typically, a market is said to be in a bear phase when the frontline stock indices drop 20 per cent or more from their recent high. 

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“Asia and EM equities are entering the late stages of a bear market that has traversed valuation, regulation, geopolitics and supply chain pressures. Near-term risks are known but still potent. Regionally, we see ASEAN and the Middle East as beneficiaries of the higher inflation and resource-constrained global picture, with favourable macro-stability positions and growth supported by reopening. North Asia is more challenged by a weaker export outlook and semi downcycle,” wrote analysts at Morgan Stanley in a recent report led by Jonathan F Garner, their chief Asia and emerging market strategist in the recent note.

CHART: Morgan Stanley's global forecast

Over the next 12 months, Morgan Stanley forecasts range-bound markets for equities, credit, yields, and the US dollar. As a base case, it pegs the MSCI EM index at 1060 levels in the second quarter of 2023 (Q2-23) – a modest around 3 per cent upside from the current levels. 

 

The bear-case scenario marked by recession, sharp tightening in financial conditions, dip in growth, sticker inflation, tighter Covid restrictions in China and negative geopolitical developments in Europe, and bull-case scenario that sees the recent fall in equities is just a mid-cycle correction, expects rate hikes to come through as forecasted, healthy consumer and corporate balance-sheets despite dip in growth and positive geopolitical situation in Europe peg this index at 890 levels and 1340 levels, respectively by Q2-23.

A bullish exception, however, remains energy, where they have an above-consensus forecast and continue to like energy as a positive carry inflation hedge. A positive view toward energy, and more caution toward metals, as a result, has made them overweight in commodities.

Macro and earnings data points, Morgan Stanley said, continue to soften as global economies move toward later-cycle phases. Cost pressures, it believes, still remain an issue for corporates around the world and cautions risks to margin expectations for global companies for the coming quarters amid sticky input/labor costs.

The US equity market faces a host of risks from slowing macro growth to cost pressures/inflation to a hawkish Fed. Those risks, coupled with still elevated valuation levels, inform our view that the US is likely to underperform over the next 12 months," Morgan Stanley said.

Region-wise, Morgan Stanley has upgraded Brazil to overweight, and continues to prefer commodity exporters, including Saudi Arabia, Australia, Indonesia and Singapore as beneficiaries of the ASEAN upswing. Among regions, Morgan Stanley has moved back Mexico to underweight, which remains structurally challenged, alongside New Zealand and Hungary.

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