Via Morgan Stanley today
As regular readers know, Morgan Stanley is pretty bearish on global risk assets. This applies to emerging markets (EM) too, where we’ve been calling for wider credit spreads, weaker EM currencies, particularly in Asia, and lower equity prices. However, not so long ago the narrative guiding investors ran something like this: The Fed was ahead of the curve, EM bond yields looked attractive in a world of negative interest rates and a US-China trade deal seemed within reach. Meanwhile, EM equity earnings were supposed to be enjoying a 2H19 upswing, led by a Chinese economic recovery and easy comps for sectors like autos and IT hardware.
How quickly things change! In the past few weeks, we’ve seen the Fed deliver a hawkish rate cut and pass up multiple opportunities to turn more dovish, the US state that it would impose tariffs on all remaining imports from China, loan growth and activity for July disappoint, CNY break 7 versus USD, the US label China a currency manipulator, tensions flare up between India and Pakistan, protests intensify in Hong Kong and Argentina’s primary elections deliver a surprise – all leading to sharp moves lower in EM risk asset prices. The bulk of the weakness may now be behind us, and the asset class will probably trough before year-end, but we think there’s a bit more to come in the short term. We wouldn’t be surprised to see MSCI EM equities undershoot our June 2020 base case target of 940 (-4%Y), further losses for Asia FX, and EM credit spreads settle around 380-400bp versus 370bp now.
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