Business

Morgan Stanley's Asia chief issues bearish 12-month view on emerging-market and Japan stocks

Bloomberg

If you’re counting on another great year for emerging-market stocks, you may be disappointed.

That’s what Morgan Stanley’s chief Asia and emerging markets equity strategist Jonathan Garner suggested in a Jan. 15 report, arguing that early performance trends aren’t reliable full-year predictors for developing markets.

For investors who were around 18 years ago, there may be a sense of deja vu. In emerging markets and Japan, 2018 may be a year like 2000, “which begins well, gets more difficult and ends badly,” analysts led by Garner said in the report, citing late-cycle economic expansion, global equity bull market, central banks tightening policies and rising inflationary pressures.

And that was a year when the MSCI Emerging Markets Index of stocks plunged 32 percent, and Japan’s Topix tumbled 25 percent — a bleak picture for those celebrating this year’s strong start. Developing-nation equities are up 5 percent year-to-date, building on its 34 percent rally last year, while the Japanese stock benchmark is still trading at a 26-year high.

While Morgan Stanley’s year-end targets aren’t implying a decline that dramatic — 2.1 percent for the MSCI Emerging Markets Index from its Monday close and 3.4 percent for the Topix — analysts cite broad concerns on valuations of developing-nation stocks and Japan, excluding financials.

Separately, Morgan Stanley analysts say Asian airport operators’ earnings, and their share prices, may be ready to take off.

Rising wealth, improving connectivity and social media penetration will spur spending on international air travel, the analysts including Daniel Lau wrote in a research report on Jan. 16. Operating profit growth for airports under the firm’s coverage will pick up to a 9.5 percent compounded annual growth rate between 2017 and 2022, from 6.1 percent in the last five years.

Morgan Stanley’s key stock picks include Japan Airport Terminal Co. Ltd., Airports of Thailand PCL, Shanghai International Airport Co. Ltd. and Sydney Airport Corp. Ltd.

While earnings growth will support valuations, risks include the loss of duty-free operators, higher capital expenditure and rising interest rates, according to the note, which didn’t include fuel costs on the list.

Crude oil prices near a three-year high have started weighing on some Chinese airline stocks. Brent crude in London closed above $70 on Monday, threatening to boost the biggest operating cost for carriers.

Coronavirus banner