Emerging markets are likely to outperform U.S. markets, witnessing stable growth against United States’ cooling economic expansion next year, a Morgan Stanley MS report predicted earlier this week. This, in turn, could make emerging market stocks more lucrative than U.S. stocks for investors.
Stocks in emerging markets (EM) may start to increase soon, Morgan Stanley’s Global Strategy Outlook report for 2019 cited. This expected rise in emerging market stocks is the reason behind the bank’s preference for these stocks over domestic stocks next year.
"We think the bear market is mostly complete for EM," Morgan Stanley said in the Nov 25 report, citing that stocks outside America will do better than their peers in the United States. The bank also upgraded emerging market stocks from underweight to overweight for next year, while downgrading U.S. stocks to underweight.
Although the MSCI Emerging Markets Index, which measures stock market performances in 23 emerging economies, slipped 16% in 2018, the bank expects it to rise 8% from its current levels by December 2019. This prediction outpaces Morgan Stanley’s estimations of 4% growth for MSCI Europe and S&P 500 indexes.
Morgan Stanley estimated the U.S. economy to slow down significantly next year, which could be the result of a key macroeconomic shift. The bank estimates this to put an end to America’s economic outperformance altogether.
Morgan Stanley expects U.S. economic growth to slow down from 2.9% estimates in 2018 to 2.3% next year and 1.9% in 2020. The dampening effect of the U.S. economy could be reflected in dollar’s performance, giving emerging economies space to shrug off huge debts that are denominated in dollar. This is a crucial factor behind emerging markets’ projected rise.
The bank deemed Chinese equities equal-weight, citing that the scenario could change based on the outlook for the trade dispute or faster easing by Chinese policy makers.
The ongoing tariff war between the United States and China could be the key macroeconomic shift, given that the issue is yet to be resolved. While President Donald Trump and his Chinese counterpart are set to meet and discuss trade next month, an affirmative outcome that could put an end to the trade war is unlikely.
Morgan Stanley listed a couple of emerging market economies that could be ideal for investments. According to the bank, India, Brazil, Indonesia, Peru, Thailand and Poland are going to outperform other emerging market nations.
In addition, the bank chose value stocks over growth stocks worldwide. Value stocks refer to those stocks that are trading at a price lower than their actual worth, while growth stocks are companies that have a lot of potential for growth.
Therefore investing in value stocks from these above-mentioned nations could be prudent in the near future.
We have hand-picked a couple of Indian and Brazilian equities that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have a Value Score of A or B.
Azure Power Global Ltd. AZRE is a producer and developer of solar energy and is based in New Delhi, India. The company carries a Zacks Rank #2 and has a Value Score of B. The company’s expected earnings growth rate for the next quarter is more than 100%.
National Steel Company SID is a leader of the Brazilian steel industry, and has the capacity to produce 5 million tons a year of crude steel. The company carries a Zacks Rank #2 and has a Value Score of A.
Gerdau S.A. GGB is the largest long steel producer in Latin America. The company carries a Zacks Rank #2 and has a Value Score of B.
Cosan Limited CZZ is the leading global ethanol and sugar company in terms of production with low-cost, large-scale and integrated operations in Brazil. The company carries a Zacks Rank #2 and has a Value Score of A.