Key Points
- “We believe it is time to turn overweight on Growth stocks in Asia/EM again,” Morgan Stanley strategists said in a note.
- Morgan Stanley forecasts Hong Kong’s Hang Seng Index to gain another 28% from current levels by the end of this year and China’s CSI 300 to gain another 14%
Morgan Stanley strategists say it’s “time to turn bullish” on Asia and emerging markets’ growth stocks. Citing easing financial conditions ahead, the U.S. investment bank’s analysts said: “With market volatility and bond yields starting to moderate, we are turning outright bullish on Growth over Value again in Asia/EM after taking a tactical neutral stance in Feb-23,” according to a Sunday note. The strategists said the bond futures market is expecting the Federal Reserve to hike rates at its upcoming FOMC meeting this week, followed by rate cuts by the end of the year. Growth stocks will benefit from such easing financial conditions, they said. Morgan Stanley said the latest economic data from the region also point toward strong momentum ahead. “From quant perspectives, we believe liquidity is now on our side,” the strategists wrote. “With the strong PMI momentum in Asia/EM, and a peaked US terminal rate expectation, we believe it is time to turn overweight on Growth stocks in Asia/EM again,” they said, referring to the level at which the Fed is expected to stop raising rates. While we would expect some tightening in lending standards in Asia as a reaction to recent events, the magnitude and persistence are likely to be less intense than what is likely to transpire in the U.S. Morgan Stanley The Chinese central bank’s decision to cut its reserve ratio requirement — the amount banks are required to keep as reserves — by 25 basis points last week also provides further support the bullish sentiment toward emerging markets, they said. Asia stocks to rise Morgan Stanley in a separate note on Friday wrote that Asia equities outside of Japan will likely outperform developed markets as global economies brace for further impact from issues in the banking sector. .HSI 1Y line “The recent bout of financial stress in the US and EU has shifted the debate away from the potential for a ‘no landing’ scenario, and back to the depth of the slowdown and hard landing risks,” strategists including Jonathan Garner said in a note last week. “But given the relatively manageable inflation challenge and policy rate cycle for Asia, we think it should also refocus attention on the growth outperformance in the region,” they said. The U.S. bank sees further room for stock indexes in Asia to rise. Morgan Stanley expects Hong Kong’s Hang Seng Index to gain another 28% from current levels by the end of this year and China’s CSI 300, which tracks the largest mainland-listed stocks, to rise by another 14% in the same period. Asia may be better placed Morgan Stanley said in a separate note that Asia markets are likely to still outperform their global peers in developed markets amid the latest banking sector turmoil. “We saw a number of factors which would keep Asia’s domestic demand robust, hence helping its growth outperformance,” its economists said in a note published shortly after UBS agreed to buy Credit Suisse for $3.2 billion. “While we would expect some tightening in lending standards in Asia as a reaction to recent events, the magnitude and persistence are likely to be less intense than what is likely to transpire in the US, thereby mitigating the impact on Asia’s growth outlook,” they wrote.
