Morgan Stanley says EM, Asia ex-Japan stocks likely to be bottoming amid extreme selling

After a long long stretch of losses, stocks in emerging markets and Asia excluding Japan are close to completing their bear market cycles, according to Morgan Stanley.

The investment bank s strategists, including Jonathan Garner, wrote in a note Tuesday that these markets are likely to be bottoming amid abundant signs of extreme selling. They upgraded emerging-market and Asia ex-Japan stocks to overweight from equal-weight.

The reassessment of Garner and team predicted deepening routs in emerging and China markets earlier this year, follows the longest ever peak-to-trough run for the MSCI Emerging Markets Index as a surging dollar and China's stringent Covid restrictions took a toll.

Morgan Stanley expects the MSCI EM benchmark to rally about 12% from Tuesday s close to June, which has slumped for five straight quarters and lost 26% this year.

A lot of wood has been chopped and it is time to plant saplings for the next cycle, Garner and his colleagues wrote. Investors should rotate to proven early-cycle beneficiaries as well as upgrade Korea, Taiwan equities as well as Asia's semiconductor and tech hardware sectors to overweight.

The MSCI EM index is poised for its fourth annual underperformance against a gauge of developed market equities. China has a lot to blame for the historic downturn in EM shares, with the nation s Covid-Zero policy, property crisis and tensions with the West making its markets one of the world's worst performers.

Over the next 12 months, that issue will keep China from outperforming, as it is likely to participate in an EM rebound due to its oversold state and low valuations, Morgan Stanley said.

The Hang Seng Index went up more than 6%, playing catch-up to a global rally that came after weak US economic data spurred bets that the Federal Reserve won't be too aggressive in raising rates.

Garner's US colleague Michael J. Wilson - one of Wall Street's biggest equity bears - still sees further downside in US equities. He has predicted an eventual low for the S&P 500 later this year, or early next, at the 3,000 to 3,400 point level.

A framework of 10 signposts that Morgan Stanley uses to identify market inflection points now indicates a high probability for a trough to form for EM and Asian stocks, signaling a compelling buying opportunity, according to the note.

In a new cycle, South Korea and Taiwan are the highest conviction opportunities, as both markets have substantially underperformed this year and a turning point in the semiconductor inventory cycle is near, Garner s team wrote.

In separate reports, the US investment bank also upgraded its stocks, including Korean chipmaker SK Hynix Inc., Apple Inc. supplier LG Display Co. and Taiwan Semiconductor Manufacturing Co.. Asian chip stocks rallied on Wednesday.

Morgan Stanley lowered its views on some of the year's outperformers by downgrading India and Malaysia to underweight and moving Indonesia, Singapore and Chile to equal-weight. Mexico was raised to neutral by the bank.

The Dollar isn't causing havoc everywhere but America.