Morgan Stanley’s mid-year outlook lists three reasons why the developed markets will be leading global equities, ahead of emerging markets

As economies across the globe gear up for the post-coronavirus world, analysts at Morgan Stanley expect emerging markets to fall out of favour as global equities will continue to be led by developed markets. The global investment bank in its Asia EM Equity Strategy Mid-Year Outlook, said that superior stimulus among developed countries against adverse coronavirus outcomes in emerging markets is why equities will continue to lag behind in markets such as India, Singapore, Russia, and Brazil. Morgan Stanley has said that the global economy is in a new expansion cycle and output will return to pre-coronavirus levels by the fourth quarter, hinting at a V-shaped recovery.

Morgan Stanley’s mid-year outlook lists three reasons why the developed markets will be leading global equities, ahead of emerging markets. Primarily the conclusion drawn by Morgan Stanley is based on developed markets having a better policy and funding scope, when compared with emerging markets, clearly making them the market leaders post the virus. With economies now opening up businesses around the world after witnessing a period of lockdown, the report said that macro indicators show recovery is underway and will only pick up steam from now on. “China is on track to return to positive growth in June, developed markets will exit recession in 3Q20 while EMs ex-China – a beta play this cycle – will post positive growth by 2Q21,” Morgan Stanley said. 

The other two reasons behind the overall outlook favouring developed markets include; an emerging market corporate leverage overhang, resulting in CCC risks to cash flow, capex and capital raising; and Less spillover from Chinese stimulus to commodity exporters, given the relative size/structure of stimulus versus 2008. Among emerging markets, Morgan Stanley continues to favour Japan among Asian markets. China too remains overweight, helped by the first in and first out dynamic that already puts China on a path to recovery. 

Among emerging markets, Morgan Stanley has received target prices for key indices. The target price for TOPIX in the next twelve months has been revised upwards to 1,550 from the previous 1,350. Hang Seng is now expected to reach 23,300, down only 4% from its current market price. The Hang Seng China Enterprises Index has a target price of 9,670, translating to a 2% fall over the next year. Morgan Stanley Capital International EM index is now expected to fall 7% in the same period, revised upwards from a 19% predicted fall earlier.