Morgan Stanley IM Sees Tide Turning Toward Emerging Markets
(Bloomberg) -- Morgan Stanley Investment Management’s Jitania Kandhari says Federal Reserve interest-rate cuts and a weaker dollar are opening the door to a period when emerging-market equities outperform US stocks.
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Growth and interest rates that were favoring the dollar “are now peaking and moving in favor of the ex-US universe,” said Kandhari, deputy chief investment officer and head of macroeconomic research for emerging markets at the New York-based firm. “The overall macro fundamentals look good” for emerging markets, she told Bloomberg News.
Kandhari is sticking with her call that the 2020s still are the “decade of emerging markets,” even after a period of disappointment. The MSCI Emerging Markets Index is up 11% so far this year, trailing the S&P 500 — which is up 20% — for a sixth straight year as of Sept. 24. That’s sent the ratio between the two gauges to the lowest level since the 1980s, when investors first started treating emerging markets as a distinct asset class.
“I continue to be constructive,” said Kandhari, whose firm oversees $1.5 trillion in assets. “My view was this is an asset class for this decade.”
The MSCI benchmark EM equity index rose for the fifth day to trade at its highest since April 2022 on Wednesday.
Interest-rate differentials between the US and the rest of the world have favored the US for the years because the Fed had tightened policy faster while fiscal stimulus from Washington also led to growth differentials in favor of the US and the dollar, Kandhari said. She said 10-year Treasury rates at 4% would be reasonable and “a pretty good environment for emerging-market assets.”
Emerging-market central banks that until now were “just trying to watch the Fed” will feel less constrained in cutting interest rates themselves after the Federal Reserve moved, she said.
Investors in the fund Kandhari manages, called the Passport Overseas Equity Portfolio, have done better than the benchmark with an 13% return in 2024 as of Sept. 24. But they’d still have been far better off in the US, where the so-called “Magnificent Seven” of US tech stocks: Nvidia Corp., Apple Inc., Microsoft Corp., Amazon.com Inc., Alphabet Inc., Meta Platforms Inc. and Tesla Inc. have jumped by a third this year.
Developing equities have so far this decade shown “underwhelming relative returns at aggregate index level” due to the war in Ukraine and the boom in US shares linked to artificial intelligence, Kandhari said.
India Bull
She said Indian equities remain her top overweight but she’s not increasing her exposure. India’s benchmark Sensex index has jumped 18% this year.
“The India story has still legs,” she said, expecting more purchases by foreign investors. “The flow data in India from the foreign investors side has been pretty dismal. It’s the domestic flows that have led to this liquidity buying equities in the market.”
She said she also owns “pockets of Southeast Asia” and likes eastern Europe, where the European Union funds are supportive of equity performance. Kandhari also likes select assets in Latin America.
But she remains pessimistic on the outlook for China, where the benchmark Hang Seng index soared 4% on Tuesday in its biggest advance since March after the central bank unveiled a broad package of stimulus measures, including interest-rate cuts and liquidity support for stocks. The index extended its gains on Wednesday.
“The structural trend in China is still down,” she said, citing excess debt and capacity in the economy that are creating deflationary forces and “really keeping a lid on that nominal side of growth.”
(Updates with Wednesday’s market moves)
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