The Decade of Emerging Markets Has Begun: Morgan Stanley IM

The fund manager is pulling money out of US stocks to increase its exposure to developing markets, according to jitania kandhari, deputy chief investment officer and director of macroeconomic research for emerging markets at Morgan Stanley IM. Stocks in developing countries have attractive valuations and economies like India are poised for better growth than the United States, she said.

“Every decade, there is a new market leader. In the 2010s, it was US stocks and mega-cap tech.” said kandhari in a telephone interview. “The leaders of this decade can clearly be international and emerging market stocks.” Morgan Stanley IM has $1.3 trillion in assets under management.

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The asset class has had a strong start to the year. The MSCI Emerging Markets Index is up 8.6% compared with a 4.7% advance for US stocks.

Gains occur because the withdrawal of China of its strict zero COVID-19 policy brightens the economic outlook as investors position for an end to sharp central bank interest rate hikes. Many also continue to view US stocks as expensive, and those in emerging markets are trading at a discount of nearly 30%.

There is a growing disconnect between America’s shrinking share of the global economy and the size of its market capitalization, he said. kandhari. Coupled with funding allocations to emerging markets that are well below historical averages and cheap currencies, that gives them plenty of room to outperform, he said.

“What really drives this asset class is the growth differential, and that EM growth differential is improving relative to the US growth differential,” said.

growth estimates

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Emerging economies are expected to expand 4.1% in 2023 and 4.4% in 2024 on average, according to Bloomberg estimates. Those multiples are higher than the estimates for the United States, at 0.5% and 1.2%, respectively.

The comments from Morgan Stanley IM underscore a market theme that has been gaining prominence as investors and strategists steer clear of US stocks as they approach those of the rest of the world. Developing markets bond and stock funds had inflows of $12.7 billion in the week to Jan. 18, the biggest addition on record, while U.S. stocks had $5.8 billion in outflows, according to a note from Bank of America Corp. citing data from EPFR Global.

asset allocation

Kandhari advises against following benchmark weightings in indices, particularly when it comes to China, and being selective among emerging markets.

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“China is a big part of the index, 30%, and we don’t think it’s a bigger part of the growth of the index,” he said, citing challenges for the country, including overly indebted sectors of the economy and changing global supply chains. “You really have to actively go in to invest in other countries that look promising and stay away from the benchmark weights.”

India, on the other hand, is a favorite and one of the biggest overweights in his fund.

“Everything that doesn’t work for China works for India”said kandhari. It has a growing population and lower debt than China, while China is “in the eye of a deglobalization storm” which is driving supply chain diversion and benefiting other emerging markets including Indonesia, Thailand, Vietnam and Mexico.

And while things may not be easy in all developing nations, that won’t affect the broader stock story in the same way that emerging market debt crises have in the past, he said.