EM stocks may have already peaked for the year, says Morgan Stanley

After a surge to record highs in January, EM stocks may have already peaked for the year, says Morgan Stanley.

There are eight reasons why the MSCI Emerging Markets Index won’t climb any further, analysts led by Jonathan Garner, chief Asia EM strategist (based in Hong Kong), wrote in a report. The measure has overshot and fallen below the bank’s previously-set year-end target of 1,330. 

Reasons include falling copper prices, moderating balance sheets of Group-of-Four nations, peaking sentiment on reflation, tightening liquidity in China, a steadying dollar, stalling earnings revisions, “euphoric” fund inflows, and the relative performance of Korean stocks. “If we are correct, the key to performance is market, sector and stock selection,” the strategists said. “On the market side, we are most bullish on India, with a favourable Budget further boosting the outlook.”

Morgan Stanley’s bearish warning comes after the MSCI Emerging Markets Index rose as much as 10 per cent in January to a record. 

The run-up came amid optimism that vaccine roll-outs and further US stimulus, coupled with a dovish US Fed, would create perfect conditions for EM stocks to outperform in 2021. 

The MSCI gauge has tumbled close to 2 per cent from its January 25 peak, trimming its year-to-date gain to about 7 per cent.