In a landscape of fluctuating economic trends, India stands as the focal point of favoritism among emerging markets, as observed by Morgan Stanley, one of the foremost financial institutions. Jonathan Garner, the head of emerging markets research at Morgan Stanley, underscores India’s enduring allure amid challenges in the global financial sphere.
Earnings revisions have cast a shadow over emerging market equities, compounded by the unwavering might of the United States dollar. Heightened geopolitical uncertainties and a revisit of US 10-year real yields to levels reminiscent of 2007 further compound valuation pressures. Despite this complex backdrop, India retains its status as Morgan Stanley’s favored emerging market.
Garner emphasizes India’s exceptional resilience, stating, “Relative economic/earnings growth is improving, and the macro-stability setup is robust enough to weather a higher real rate environment. India continues to enjoy a surge in domestic capital inflows, while global dynamics contribute to both Foreign Direct Investment (FDI) and portfolio investments flowing towards the country.”
The statistics speak for themselves, with India showcasing a remarkable 45.5 percent outperformance against the MSCI Emerging Markets (EM) index in dollar terms, extending from early 2021 to October 2022. Garner’s analysis suggests that India’s upward trajectory is poised to persist.
He further comments on India’s inflation scenario, noting, “Previous concerns of heightened inflation leading to abrupt monetary policy adjustments have somewhat receded since September’s Consumer Price Index (CPI) moderated to 5 percent, and core CPI continued to decelerate to 4.6 percent. The team anticipates a sub-5 percent reading for October.”
Morgan Stanley’s comprehensive report also presents noteworthy upgrades to Singapore and Poland, as both markets receive an “Overweight” designation. Singapore, characterized by its defensive stance in emerging market bear markets, demonstrates robust earnings and profitability trends.
Poland’s recent election results, indicating the possibility of an opposition coalition government, are viewed as a positive development. This outcome is expected to unlock additional European Union (EU) funds and alleviate the burden on the nation’s banking sector. Morgan Stanley asserts that while the market may have partially factored in these developments, the full potential upside might not yet be fully considered.
In contrast, South Korea and the United Arab Emirates (UAE) have witnessed downgrades to “Equal Weight” (EW). While South Korea may benefit from a semi-cycle recovery in 2024, the prospect of a substantial near-term re-rating appears less likely, given ongoing macroeconomic concerns, Garner observes.
South Korea contends with the relatively hawkish stance of the Bank of Korea, alongside high household leverage and a significant energy trade deficit, raising concerns of domestic inflation and margin challenges.
The UAE, despite its commendable earnings and profitability, has been transitioned to “Equal Weight” due to lingering geopolitical uncertainties and elevated cyclicality compared to other Gulf Cooperation Council (GCC) markets.
