Morgan Stanley IM Predicts Emerging Markets in the Next Decade

According to Morgan Stanley Investment Management, equities in developing nations are expected to do well this decade, joining a majority of investors that are shying away from the US in preference of other markets.

Shifting focus from US stocks to emerging economies stocks 

Morgan Stanley IM’s deputy chief investment officer Jitania Kandhari stated that the investment manager is redirecting cash from United States stocks to emerging markets. Kandhari is the fund manager’s research head for developing markets. According to Kandhari, emerging economies such as India have stocks offering appealing prices and are likely to grow faster than US-based equities. 

She said in a phone interview that the global capital markets have a new leader each decade. For instance, in the 2010s, US equities and mega-cap technology stocks were the most dominant. However, Kandhari explained that in this decade, leaders would be from international equities and emerging markets. Currently, Morgan Stanley IM manages close to $1.3 trillion in assets. 

Interestingly the asset category has had a solid start to 2023 as the MSCI emerging economies benchmark has jumped 8.6% relative to the US index, which is only up 4.7%. The catalyst of the gains is the anticipated end to the aggressive interest rate hikes from the central bank and China’s relaxation of its COVID Zero regulation. Most people continue to believe that US equities are overpriced, whereas emerging economies’ equities trade at a discount of around 30%.

According to Kandhari, a widening gap exists between the United States’ declining economic contribution to the world economy and the magnitude of its share market capitalization. They have a tremendous potential to outperform because of that. Additionally, money allocation to emerging economies below historical averages and cheap currencies will outperform stocks in emerging economies. 

She added that what is driving the asset category is differences in the growth of the EM relative to the US. According to Bloomberg estimates, emerging economies will grow 4.1% this year and 4.4% next year. Surprisingly these projections are higher than anticipated growth in the US of 0.5% in 2023 and 1.2% in 2024. 

Kandhari warns against following benchmark weights 

Kandhari suggests carefully considering emerging markets and avoiding benchmark weights, especially when discussing China. She said that considering China is part of the benchmark index, 30%, it is unlikely that it will be part of the benchmark index expansion. The researcher cited challenges China faces, including a considerably indebted economic sector and changing worldwide supply chains. According to Kandhari, one has to actively enter for them to invest in promising markets and avoid benchmark weights. 

India is among Kandhari’s favorites and the biggest overweight in her portfolio. She explains that only some things that seem to work for China are going well for India. For instance, India’s population is growing, and the country has low debt relative to China which is at the center of the de-globalization storm. As a result, there is a supply chain shift, with emerging markets such as Mexico, Thailand, Vietnam, and Indonesia benefiting the most.