Market outlook 2020: Global fund managers remain bullish on EM equities

Emerging market (EM) equites have emerged as the preferred investment choice for global brokerages for calendar year 2020 (CY20) as compared to their developed market (DM) peers. Easing trade tensions, they believe, is likely to reduce business uncertainty and improve the transmission of the policy stimulus enacted through 2019. That apart, they expect corporate confidence to stabilise in 2020, preventing companies from moving into labour retrenchment mode. This, coupled with accommodative monetary policies, make EMs a good investment option.

“While tensions remain in the Sino-US relationship, the level/breadth of tariff imposition may be peaking, helping natural cyclical recovery forces to come into play in Asia after two tough years. The US dollar has finally begun to turn (favouring EM more than Japan) and our team expects further decline next year. We think 2020 could be a year of portfolio reallocation to EM,” wrote Jonathan F. Garner, Morgan Stanley’s chief Asia and emerging market strategist in a recent co-authored report.

Morgan Stanley has raised their stance on EM equities to equal-weight from underweight and maintains an overweight stance on Japan in a global equities context. They expect global economy to start improving from 2020 and continue this momentum in 2021. “We also upgrade Russia to overweight. Other key major market overweights remain Brazil and India. We remain equal-weight MSCI China versus EM and downgrade A-shares to equal-weight versus offshore China indices,” Garner wrote.

As regards India, Morgan Stanley sees double-digit local-currency returns for the S&P BSE Sensex in 2020 with a comprehensive policy easing effort underway to address the deep slowdown in domestic growth and stress in the non-bank financial sector.

Those at Credit Suisse agree and also maintain their overweight stance on EMs. Global emerging market (GEM) equities owing to worries over China’s slowdown, trade concerns, and a stronger dollar, Credit Suisse says, have become too cheap and are a good investment bet for 2020. Within EMs, India remains one of their high conviction ideas with an ‘overweight’ stance.

“We believe one of the key drivers of GEM equities is the currency. Many of the tactical factors (relative economic momentum, relative earnings revisions, a stabilisation in China PMIs, the rise in foreign exchange reserves and positioning) are now much more supportive. This is one of our top high-conviction overweights for 2020,” wrote Andrew Garthwaite managing director and global equity strategist at Credit Suisse in a recent co-authored report.

CLSA, however, remains selective within the EM pack and as an investment strategy, has retained its overweight stance on Korea and Taiwan; maintains neutral on China and Australia. India, Indonesia, Malaysia, Philippines, Thailand, Hong Kong and Singapore are the markets they are underweight on going into 2020.

Jefferies, on the other hand, remains cautious on Indian equities given the run up seen thus far in CY19. That apart, valuation of the Indian markets is also a concern for them amid slowing growth.

“We remain defensive, also noting that India's extended valuations amid buoyant flows also appear to price in tailwinds from announced and anticipated policy interventions like income tax cuts. Financials may continue to do well, but discretionary and staples may not. We remain underweight on both in our model portfolio, therefore, still preferring industrials and technology instead," says Somshankar Sinha, managing director and head of equity research for India at Jefferies.