Morgan Stanley sees the US economy in a sharp slowdown next year, along with a pick-up in global inflation that keeps monetary tightening intact.
For investors, that means get out of credit, stock up on cash and head to emerging markets, the bank’s strategy team said.
“The bear market is mostly complete for EM [emerging markets], has further to go in US credit and is about to begin for the US dollar,” strategists led by Andrew Sheets wrote in a note on Sunday.
VALUE, NOT GROWTH
Value should beat growth in stocks, US Treasury yields should converge with eurozone counterparts and rising default rates would put strains on “BBB”-rated corporate debt, they said.
A key macroeconomic shift would be the end of out-sized US economic outperformance, with US growth seen at an annualized rate of just 1 percent by the third quarter of next year. Stocks outside the US would do better than their US peers, according to Morgan Stanley.
With growth slowing and earnings weakening, leveraged corporate securities would get hit the hardest, the strategists wrote, adding that they advised a 5 percent underweight allocation to credit relative to benchmarks.
Geographically, they see the “potential for Asia to bottom in 2019,” one of the few silver linings.
US SLOWDOWN
A US slowdown, and consequent pause in US Federal Reserve tightening at some point next year, would offer emerging markets a respite from the pressure posed by US Treasury-yield and dollar gains this year.
The MSCI Emerging Market Index underperformed its developed-world counterpart for much of this year, although that trend has started to shift in the past few months.
Emerging-market equities scored a “double upgrade” from Sheets and his team, to “overweight” from “underweight,” while the US was cut to “underweight.”
Holding relative to other emerging nations, China warrants an “equal weight,” although that could change depending on the outlook for the trade war or faster easing by Chinese policymakers, according to Morgan Stanley.
Chinese stocks should outperform in Asia as a dimming economic outlook forces Beijing to take more aggressive measures to boost growth, Goldman Sachs Group Inc said.
While Asian equities have overshot to the downside this year, returns next year would be “fairly subdued,” Goldman Sachs head Asia-Pacific equity strategist Timothy Moe told reporters in Hong Kong.
Any rebound in the region’s stocks next year would likely be moderate as estimates on corporate margins were “too optimistic,” Moe said.
POLICY EASING
Goldman recommends buying beaten-up Chinese A-shares on the expectation that policy easing measures would start to lift markets in the first or second quarter of next year.
“Given quite a challenging global macro and growth environment, we expect policy to be quite supportive and China to ease policy more aggressively in 2019,” Goldman China strategist Kinger Lau (劉勁津) said.
Goldman also upgraded its recommendation on the Philippines to “overweight” and lifted Australia, Thailand and Malaysia to “market weight,” while cutting Taiwan, Hong Kong and South Korea to “underweight.”
The bank expects US-China trade concerns to intensify further, but there is a good chance of a “pause” in the tariff dispute, Moe said.
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