Asia and emerging market equities are entering the late stages of a bear market but earnings and valuations aren’t sufficient to call a turnaround, according to Morgan Stanley, which maintained a neutral top-down view for the region.
Risks are known but “still potent” and there is a possibility of more downside ahead, the firm’s strategists including Jonathan Garner wrote in a note on Tuesday. The bear market has “traversed valuation, regulation, geopolitics and supply chain pressures,” they wrote.
The Chinese market’s “potential final leg is likely to be bumpy” due to Covid-induced lockdowns and a gloomier global outlook, strategists led by Laura Wang wrote in a separate note. “Policy easing cycle is forming, but timing and scale are contingent on Covid control, implying likely front-loaded risks.”
Global monetary tightening, raging inflation and Chinese lockdowns have so far dashed hopes of Asian equities finding a footing this year. A four-month slump has wiped out more than $2 trillion in market value from Asia in 2022, while benchmarks carrying Chinese stocks are among the world’s worst performers.Morgan Stanley said it prefers Japan, due to its return ratios, and countries that export commodities or benefit from higher interest rates. The US investment bank upgraded Brazil to overweight and said the firm continues to like Saudi Arabia, Australia, Indonesia and Singapore.