From Domainfax comes Morgan Stanley:
“We believe [global economic] expansion is still in tact, with strong consumer trends in developed markets helping to offset the drag of [emerging markets] growth,” Morgan Stanley said in its updated Autumn Outlook paper.
“This is one reason why we think investors should approach recent weakness as a bull-market correction, rather than a more ominous turning point.”
Adding to Morgan Stanley’s optimism was that monetary and fiscal policy in emerging markets remained accommodative, while commodity prices and China’s currency seem to have stabilised.
“Economic activity is showing signs of stabilisation, particularly in manufacturing and China’s housing markets,” strategists James Lord and Hans Redeker said.
“This should help capital flows to normalise, reducing the need for currency intervention to maintain stability” of the Chinese yuan.
That would both reduce the need for China to make another snap devaluation from its peg to the US dollar, the first of which took place on August 11, sending markets into a shock sell-off. But China’s monetary policy could become more effective.
“We recommend investors raise their exposure to [emerging markets]/commodities given the combination of very low sentiment, attractive relative valuations and a likely inflection in macro sentiment,” European strategist Graham Secker said.
But Mr Lord and Mr Redeker warned the long-term view for emerging markets remained “challenging” due to a lack of growth prospects, and high debt levels.
So, this is a tactical call on the Santa rally, then. Could be right, could be wrong. Over the stretch, the latter is the very firm favourite:
- Chinese easing by definition devalues the currency and capital flight will continue;
- if developed market growth lifts EM boats, DM rates will rise and sink them;
- the EM business model remains busted and so, therefore, are commodities.
The only real hope for any sustained (that is, more than a couple of quarters) recovery in China, EMs and dirt is QE4 and that is not in sight and will likely only arrive when it is too late.
