India most preferred EM market, South Korea downgraded: Morgan Stanley

Relative economic/earnings growth is improving and the macro-stability setup looks sufficient to withstand the higher real rate environment, said Morgan Stanley on India

Earnings revisions continue to weigh on emerging market equities, while a strong US dollar compounds the problem. Meanwhile, rising geopolitical risks and a retest of US 10-year real yields at levels not seen since 2007 are exacerbating valuations, according to Jonathan Garner, head of emerging markets research at Morgan Stanley.

In the midst of all this, India continues to be Morgan Stanley’s favorite emerging market.

"Relative economic/earnings growth is improving and the macro-stability setup looks sufficient to withstand the higher real rate environment. The dream run of domestic flows continues and multipolar world dynamics are driving both FDI and portfolio flows toward India," as per Garner.

India has been structurally outperforming MSCI EM by 45.5 percent, in dollar terms, from early 2021 until October 2022, and Garner expects this outperformance to continue.

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"Previous concerns of a higher inflation causing abrupt changes in monetary policies have somewhat abated after September CPI (consumer price index) moderated to 5 percent and core CPI slowed further to 4.6 percent, with the team forecasting below 5 percent in October," he noted.

Morgan Stanley's report also includes upgrades to Singapore and Poland, designating them as Overweight markets. Singapore typically more defensive stance in EM bear markets and is displaying robust earnings and profitability trends.

Poland's recent election results, suggesting a likely opposition coalition government, are seen as a positive development, likely to unlock additional European Union (EU) funds and ease burdens on the nation's banks. Although the market had partly anticipated these outcomes, Morgan Stanley believes the full potential upside may not have been fully factored in.

Also Read: Morgan Stanley upgrades India to overweight, downgrades China

On the other hand, South Korea and the United Arab Emirates (UAE) have been downgraded to Equal Weight (EW). While South Korea may benefit from a semi-cycle recovery in 2024, substantial upward re-rating in the near term seems less likely due to persistent macroeconomic concerns, said Garner.

The relatively hawkish stance of the Bank of Korea, coupled with high household leverage and a substantial energy trade deficit, could result in challenges such as higher domestic inflation and margin headwinds, he added.

Also Read: India's economy will reach $7 trillion by 2030, forecasts JPMorgan’s James Sullivan

The UAE, despite its strong earnings revisions and profitability, has been moved to EW due to ongoing geopolitical uncertainties and higher cyclicality compared to other Gulf Cooperation Council (GCC) markets, as per Morgan Stanley.

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