Asian and emerging markets are entering the latter stages of a bear market, Morgan Stanley analysts said in their mid-year stock market outlook note on Wednesday. The short-term risks, according to the research and the brokerage, are known, but powerful.

Typically, a market is said to be in a bearish phase when front-line stock indices fall 20% or more from their recent high.

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“Asian and emerging equities are entering the latter stages of a bear market that has weathered valuation, regulatory, geopolitical and supply chain pressures. The short-term risks are known but still powerful. Regionally, we see ASEAN and the Middle East as beneficiaries of rising inflation and the resource-constrained global situation, with favorable macroeconomic stability positions and sustained growth from reopening. North Asia is more challenged by a weaker export outlook and a semi-bearish cycle,” Morgan Stanley analysts wrote in a recent report led by Jonathan F Garner, their chief investment strategist. Asia and emerging markets in recent note.

CHART: Morgan Stanley’s Global Forecast

Over the next 12 months, Morgan Stanley forecasts limited markets for stocks, credit, yields and the US dollar. As a base case, it pegs the MSCI EM index at 1060 levels in the second quarter of 2023 (Q2-23) – a modest upside of around 3% from current levels.

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The bearish scenario marked by a recession, a sharp tightening of financial conditions, a drop in growth, self-adhesive inflation, tighter Covid restrictions in China and negative geopolitical developments in Europe, and a bullish scenario which sees the recent fall in the equities is just a mid-cycle correction, expects rate hikes to materialize as expected, healthy consumer and corporate balance sheets despite slowing growth and positive geopolitical situation in Europe set this index at levels of 890 and 1340, respectively by Q2-23.

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One bullish exception, however, remains energy, where they have an above-consensus forecast and continue to like energy as a positive hedge against inflation. A positive view of energy and, consequently, a greater caution towards metals led them to overweight commodities.

Macro and earnings data points, Morgan Stanley said, continue to soften as global economies move into later cycle phases. Cost pressures, he said, remain an issue for businesses around the world and warn of risks to global businesses’ margin expectations for the coming quarters amid high input/labour costs. rigid works.

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The US stock market faces a host of risks ranging from slowing macroeconomic growth to cost/inflation pressures to a hawkish Fed. These risks, coupled with still high valuation levels, tell us that the US is likely to underperform over the next 12 months,” Morgan Stanley said.

Regionally, Morgan Stanley upgraded Brazil to overweight and continues to favor commodity exporters including Saudi Arabia, Australia, Indonesia and Singapore as beneficiaries of the ASEAN recovery. . Among regions, Morgan Stanley reduced Mexico to an underweight position, which remains structurally difficult, alongside New Zealand and Hungary.


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