Aggressive stimulus by China, US Federal Reserve’s decision to put interest rate hike on hold and signs of a thaw in the US-China trade war have prompted the brokerage to take an optimistic view on the EM universe.
“The aggressive China stimulus, a longer Fed pause, positive signs for the US-China trade negotiations and a shares index inclusion lead us to raise our targets,” said Jonathan Garner, chief strategist Asia and EM, Morgan Stanley in a note dated March 10.
The target for the MSCI EM index has been raised by 8 per cent to 1,130 from 1,050. The index hovered around 1,035 on Monday. The target for the MSCI Asia ex-Japan index has been increased by 3 per cent to 540.
Morgan Stanley has raised 2020 earnings per share (EPS) forecast for EMs to $98.4 from $95.1. It has re-rated the MSCI EM index, assigning it forward price-to-earnings (P/E) of 11.5 times, from 11 times earlier.
It the note, the brokerage said it remains overweight on EM equities and has outlined five key drivers that will boost the markets.
Morgan Stanley says the next Fed rate hike has moved from June to December with a lower US real rates profile, and this will boost EM valuations. Also, earnings season data was “slightly better than feared”, it said.
Within EMs, Morgan Stanley is overweight on Brazil, China, India, Indonesia and Singapore. On the other hand, it is underweight on Australia, Mexico and the Philippines.
Morgan Stanley says elections will “loom large” as a catalyst in the April-June quarter. “While pre-election fiscal spending is helping support domestic demand, particularly in India and Indonesia, they will bear close monitoring — particularly in a tight contest,” it says.
Besides India, there are general elections in Thailand, Indonesia, South Africa, the Philippines and Australia.