Expect 8% upside in MSCI emerging market index in 2019, says Morgan Stanley
Morgan Stanley has issued a double upgrade on emerging markets (EMs) as part of the global call for 2019. The tough run for emerging markets Stocks could change considerably next year, said Morgan Stanley in its Global Strategy Outlook report for 2019. The global investment bank has upgraded EM from underweight to overweight and has downgraded US stocks to underweight.
In an interview to CNBC-TV18, Jonathan Garner, Chief Strategist Asia and EMs at Morgan Stanley shared the basis for the upgrade. Garner said they expect 8 percent upside in MSCI emerging market index in 2019. Going forward, the US will underperform and EMs will do a lot better, he said, adding that Morgan Stanley's key EM overweights for next year are India, Brazil, Indonesia and Taiwan.
Edited Excerpts:
What has driven this upgrade, do you think now EM growth delta will be higher than US growth?
We think that the GDP growth and earnings growth differentials versus the US should be higher going forward. So this year has been all about an upside surprise in the US and a downside surprise in the EM. As the US economy slows into the next year and EMs start to recover, we think that the Federal Reserve will go on hold by the middle of the year on Fed Funds and also stop shrinking its balance sheet. The Chinese easing cycle will come to the fore and the low oil prices will be important, particularly for a country like India.
So, we think we are going to see a major trend reversal in terms of global market performance. We have been very cautious about EMs, they have underperformed.
Going forward, the US will underperform and EMs will do a lot better. So our key EM overweights for next year are India, Brazil, Indonesia and Taiwan.
Where would be India in the pecking order because it is seen as the biggest beneficiary of crude price fall and also your thoughts on fund flows because we have to see some kind of foreign money inflow into Indian markets once again?
In terms of overweight, India is one of our key overweights. My colleague Ridham Desai has a Sensex target of 42000. We like financials and materials exposure and domestic cyclical in the Indian market and we think along with other countries, that I mentioned, are likely to have a pretty robust growth environment and is less at risk from trade and tariff tensions than some other countries in North Asia.
We had a period where there were quite substantial outflows around the middle of the year in Q3 but they have steadied recently, which is encouraging. The primary and secondary market calendar for new issuances across Asia and EM is quite light at the moment, which tends to allow the headline indices to gain a footing here.
On the fund flow side, as long as you are right about this broad pattern of dollar weakness and US growth slowing then we should get a continued improvement in fund inflows.
I want to also ask you about the growth scare that has hit global markets but before that, you did speak about the double upgrade on emerging markets, what kind of absolute returns would you see for 2019 because this year MSCI emerging market index is down about 14 percent or so.
Our new target till December 2019 is 1050, about 8 percent upside. Obviously, for some markets like the Sensex, we have more. For Hang Seng we have raised our targets to 28500, that is about 10 percent. For the S&P we had actually rolled our target over at 2750, so we did not change it, so that only gets 4 percent upside. So, it is quite meaningful. We also have more upside for Japan than we do for the US. So, we are making a broad out of the US and into rest of the world call today.
What about the growth scare globally, would that worry you at all and do you think that could drag global equities down with it at least in the first part of 2019?
The fact that you are asking about it probably shows that it is in the price. If we look at what worried us a year ago, it was exactly this environment where people would be concerned as we were looking then at the twin tightening from China and the US. China has had a very significant slowdown - the global autos, mobile phone handset, memory and DRAM markets are quite obviously in a major cyclical slowdown right now, but that is priced in.
A year ago we were trading about two standard deviations expensive to normal average on forward PE for emerging markets. We are now about 1.5 standard deviations cheap, so around 10 times forward PE. For Japan, we are actually two standard deviations cheap. Basically, the cheapest we have seen in five years. So, the market has priced in a global growth scare in our opinion here.
What is the in house view on crude at all? The world is in a tizzy, is $86 per barrel real or $58-59 per barrel more real for Brent?
We are down in a situation where the market is oversupplied and that is very clear from the inventory situation we find ourselves in. We would take the view that the oil price is going to be less of a headwind going forward and that is particularly important for some of the current account deficit countries like India.
So, did seem that even six weeks ago that $80-90 per barrel might have been likely for the first part of next year, we are now looking at something in the $60 per barrel and that is very important, it limits the potential for further rate increases in some of the countries like India that have been having to raise interest rates this year.
The question I had was about politics, how big is that as a risk considering we are now heading into elections?
There are a number of elections that are coming next year in our coverage markets including India and Indonesia. In general, our view on this is that we are expecting the fiscal position to be relatively easy in these countries and growth to be supported in the run up to the elections and that would tend to lead to a buoyant macro environment.
Now if it were not for the fact that the Fed is going on hold and the oil prices falling, that might be somewhat more dangerous from macro potential perspective. However, in this global environment, it would probably be associated with positive fund inflows.
First Published: Nov 26, 2018 7:18 PM IST
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