Emerging markets over US markets
Similar to other investment banks, Morgan Stanley (MS) doesn’t have high hopes for US markets in 2019. According to CNBC, MS said in its Global Strategy Outlook report that EMs (emerging markets) (EEM) should turn around next year, making MS prefer EMs over US (VTI) markets. While it upgraded EM equities from “underweight” to “overweight’ for 2019, it downgraded US equities (SPY) (IVV) to “underweight.”
Bear market complete
In a report released on November 25, MS stated that EMs’ bearishness is mostly complete. EMs have been under tremendous pressure this year due to rising US rates (TLT), a strong US dollar (UUP), and tensions in countries including Turkey (TUR) and Argentina. The MSCI Emerging Markets Index has fallen ~16% this year.
EMs versus US markets
As opposed to EMs’ growth, US markets’ growth is expected to moderate, to 2.3% in 2019 and 1.9% in 2020 from an estimated 2.9% this year. According to a Bank of America Merrill Lynch survey this month, fund managers have lapped up EM equities (EEM) in addition to US equities. The sell-off in EMs may have tempted investors to go bargain hunting in EM equities. Fund managers have increased their overweight positions by 8%–13% in EM equities.
Among EMs, MS prefers Brazil (EWZ), Thailand, Indonesia, India (INDA), Peru, and Poland. It also prefers value stocks over growth stocks. Investors usually rotate to value from growth during later stages of the business cycle.