Morgan Stanley sees 3% contraction in global GDP; 12% dip in MSCI EM index

The global economy appears headed to its most severe recession in the post-war era, although there is a fair chance of rapid rebound in the second half of 2020-2 on unprecedented policy easing

Morgan Stanley expects global economic growth as measured by gross domestic product (GDP) to contract by 3 per cent in 2020 before rebounding to 5.9 per cent in 2021. As regards India, Morgan Stanley sees no growth (0 per cent) for 2020, but expects it to rebound sharply to 7.7 per cent in 2021, which makes India the fourth fastest growing economy in the Asia ex-Japan region – only behind Philippines (2021e GDP growth at 12.6 per cent), Malaysia (9.6 per cent) and China (9.2 per cent).

“The global economy appears headed to its most severe recession in the post-war era, although there is a fair chance of rapid rebound in the second half of 2020-21 (H2-20/2021) on unprecedented policy easing, Covid-19 treatment,” wrote analysts at Morgan Stanley in a recent report co-authored by Jonathan F Garner, their chief Asia and emerging market strategist.

 

Besides Morgan Stanley, most economists have been revising their forecasts downward for global growth as Covid-19 pandemic stalled economic activity across the globe. Over the past few weeks, analysts at Goldman Sachs, Nomura and Moody’s have cautioned against the economic fallout of the pandemic and sharply revised their GDP forecasts. In the Indian context, the projection of an economic contraction of 5.2 per cent in GDP (earlier contraction forecast of 0.5 per cent) for financial year 2020-21 (FY21) has been the sharpest amongst the lot.

 

Inflation, according to the Morgan Stanley report, is expected to rise globally (G4 + BRIC), though India should be able to contain it at 4 per cent in 2020 and 2021. At the global level, Morgan Stanley’s forecast stands at 1.7 per cent for 2020 and at 2.1 per cent for 2021e.

Market outlook

As a base case, Morgan Stanley expects the MSCI Emerging Market index (MSCI EM) to dip 12 per cent to 800 mark from its current level of 912 by December 2020. The bull-case scenario pegs this index at 1,050 – up 15 per cent from the current levels and at 650 levels – a drop of 29 per cent from the current levels.

That said, garner believes the markets will unlikely be able to sustain the recovery from recent lows. ICICI Bank and TCS are the two Indian stocks on Morgan Stanley’s Asia Pacific ex Japan Focus List, which it labels as high conviction ideas to own.

“We think bottom-up analysts are only halfway through adjusting to this reality. With estimates likely to fall further – particularly in non-IT cyclicals – and valuations somewhat rich, we think markets are unlikely to sustain the recent rapid recovery. Markets that show either rising corporate leverage into 2020 or relatively lower funding strength scores include Argentina, Colombia, South Africa, Turkey and Thailand,” he wrote.

Among EMs, Garner expects China and Japan to continue their secular outperformance going ahead. Both markets have materially outperformed EM year-to-date (YTD), Garner says, and do have idiosyncratic risks (US/China trade tensions resurgence, Japan's relatively adverse Covid-19 experience and sector skew to old-economy cyclicals), but secular drivers of their outperformance are intact.

"We are neutral Value versus Growth to balance the risk of valuation premia erosion against the fact there is no clear near-term catalyst for reversal. Meanwhile, we prefer Quality given funding risks and the importance of sustainable competitive advantage given unprecedented macro-economic volatility," he said.