Emerging and Asian stocks are close to completing their current bear-market cycle, Morgan Stanley said, upgrading its view on the regions given more-than-average losses and attractive valuations.
There’s a high chance of a bottom forming in these markets amid “abundant” signs of capitulation, the investment bank’s strategists including Jonathan Garner wrote in note Tuesday, adding that they are shifting recommendations on emerging-market and Asia excluding Japan stocks to overweight from equal weight.
The reassessment from Garner, who correctly predicted deepening routs in emerging and China markets earlier this year, came just as EM stocks have had a record stretch from its recent peak amid a surging dollar and China’s stringent Covid restrictions.
“A lot of wood has been chopped” and “it’s time to plant saplings for next cycle,” Garner and his colleagues wrote. Investors should “rotate towards proven early-cycle beneficiaries,” they added, also upgrading Korea, Taiwan, the semiconductor and tech hardware sectors to overweight.
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.
Morgan Stanley said South Korea and Taiwan are “highest conviction opportunities into a new cycle” as both markets have substantially underperformed this year and a turning point in the semiconductor inventory cycle is near.
In separate reports, the investment bank also upgraded stocks including Korean chipmaker SK Hynix Inc., Apple Inc. supplier LG Display Co. and its Taiwanese rival AUO Corp. Taiwan Semiconductor Manufacturing Co. is among its top picks.
To fund the upgrades of Asia’s tech-heavy markets, Morgan Stanley lowered its views on some of this year’s outperformers, downgrading India to underweight and demoting Indonesia and Singapore to equal weight.
Morgan Stanley said it expects the MSCI EM benchmark, which has fallen 26% this year, to rally about 12% from now till June.