EMS in late stage of bear mkt: Morgan Stanley

Asian and emerging markets (EMS) are entering the late stages of a bear market, said analysts at Morgan Stanley in their mid-year equity market outlook. The near-term risks, the research and broking house said, are known, but potent.

Typically, a market is said to be in a bear phase when the frontline stock indices drop 20 per cent or more from their recent high.

“Regionally, we see ASEAN and [West Asia] as beneficiaries of the higher inflation and resource-constrained global picture, with favourable macro-stability positions and growth supported by reopening. North Asia is more challenged by a weaker export outlook and semi downcycle,” wrote analysts at Morgan Stanley in a recent report.

Over the next 12 months,

Morgan Stanley forecasts range-bound markets for equities, credit, yields, and the US dollar. As a base case, it pegs the MSCI EM index at 1,060 levels in the second quarter of calendar year 2023 (Q2CY23) – a modest 3 per cent upside from the current levels.

The bear-case scenario is marked by a recession, sharp tightening in financial conditions, dip in growth, stickier inflation, tighter Covid-19 restrictions in China, and negative geopolitical developments in Europe, with the index at 890 levels.

The bull-case scenario sees the recent fall in equities as just a mid-cycle correction, expects rate hikes to come through as forecasted, healthy consumer and corporate balance sheets despite a dip in growth, and a positive geopolitical situation in Europe, and peg the index at 1,340 levels.

A bullish exception, however, remains energy, where the firm has an above-consensus forecast. A positive view toward energy, and more caution toward metals, as a result, has made the brokerage ‘overweight’ in commodities.