Asian Emerging Markets Enter Late Stages of a Bear Market: Morgan Stanley

Asian and emerging markets are entering the latter stages of a bear market, Morgan Stanley analysts said in their mid-year stock market outlook note on Wednesday. The short-term risks, the research and brokerage house said, are known but potent.

A market is generally said to be in a bear phase when blue-chip stock indices are down 20 percent or more from their recent high.

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“Asian and emerging market equities are entering the latter stages of a bear market that has come through valuation, regulatory, geopolitical and supply chain pressures. The short-term risks are known but still potent. Regionally, we see ASEAN and the Middle East as beneficiaries of higher inflation and a resource-constrained global landscape, with favorable positions of macro stability and growth supported by reopening. North Asia is more challenged by a weaker export outlook and a downside half cycle,” Morgan Stanley analysts wrote in a recent report led by Jonathan F Garner, its chief Asia and emerging markets strategist in the recent note. .

CHART: Morgan Stanley Global Forecast

Over the next 12 months, Morgan Stanley forecasts range-bound markets for stocks, credit, yields and the US dollar. As a base case, it pegs the MSCI EM Index at levels of 1060 in the second quarter of 2023 (Q2-23), a modest rise of about 3 percent from current levels.

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The bear case scenario marked by recession, sharp tightening of financial conditions, falling growth, tag inflation, tighter Covid restrictions in China and negative geopolitical developments in Europe, and the bull case scenario that sees the recent drop in stocks is just a means – cycle correction, expect rate hikes to come as planned, healthy corporate and consumer balance sheets despite slowing growth and positive geopolitical situation in Europe peg this index at levels of 890 and levels of 1340, respectively, for the second quarter of 2020.

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However, one bullish exception remains energy, where they have an above consensus forecast and continue to like energy as a positive inflation hedge. As a result, a positive view of energy and more caution towards metals has seen them overweight commodities.

Macroeconomic and earnings data points, Morgan Stanley said, continue to weaken as global economies move into later phases of the cycle. He believes cost pressures continue to be an issue for companies around the world and warns of risks to global companies’ margin expectations for the coming quarters amid sticky labor/input costs.

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The US stock market faces a number of risks, from slowing macroeconomic growth to cost/inflation pressures and an aggressive 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.

By region, 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 rally. Among regions, Morgan Stanley has again underweighted Mexico, which continues to have structural problems, along with New Zealand and Hungary.


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