Web Exclusive
Morgan Stanley, Jefferies turn cautious on EMs amid coronavirus fears

Escalation of coronavirus fears over the past few days have not only rattled financial markets, but also made global brokerages cautious on the road ahead for emerging market (EM) equities.

On Monday, analyst at Morgan Stanley cut their December 2020 target for the MSCI Emerging Market Index (MSCI EM) from the earlier 1,150 to 1,100 now, translating into a negligible rise. Similarly, the targets for MSCI Asia Pacific index (ex-Japan) – MSCI APxJ, Hang Seng and MSCI China have also been slashed. The brokerage firm also lowered earnings growth forecasts below consensus estimates for all markets, except Japan, which remains the through-the-cycle overweight in their coverage, helped by bottom-up restructuring, improving capital management and governance improvement.

“Oscillation between a recovery-driven euphoria of mid-January toward coronavirus-induced growth fears, then initial stabilisation, suggests our 2020 theme is intact. We remain equal-weight on EM (overweight TOPIX), while cautious about short-term earnings risks and awaiting signs of production/travel normalisation,” wrote analysts at Morgan Stanley in a recent report co-authored by Jonathan F Garner, Morgan Stanley’s chief Asia and emerging market strategist.

On Monday, fears that the coronavirus outbreak in China will grow into a pandemic with disruptive and deadly consequences for countries across the globe spooked most equity markets. The virus, which has killed 2,442 people in China, has reportedly spread to 28 other countries now, with a death toll of nearly two dozen. Infections and deaths, according to reports, have risen in South Korea, Italy and the Middle East.

As a result, Nikkei futures tumbled 2.7 per cent, EuroStoxx 50 futures declined about 2 per cent while futures for London’s FTSE skidded 1.3 per cent. Asian shares were also a sea of red. Back home, the S&P BSE Sensex plunged 807 points, or nearly 2 per cent, to settle at 40,363 levels. On the NSE, the benchmark Nifty lost 251 points or over 2 per cent to end the session at 11,829 levels. Volatility index India VIX jumped 26 per cent to 17.21 levels.

Clearly the hope and indeed still the base case is that the virus, which appears to be an extreme form of viral flu, will burn itself when the weather changes as was indeed the case with Sars, experts say.

Christopher Wood, global head of equity strategy at Jefferies believes the best way of hedging long equity exposure is to remain long Eurodollar futures which are now discounting one 25 basis point (bps cut) this year.

“As for the fixed income market, it has already rallied significantly meaning bonds are, yet again, sending a very different signal from stocks trading near all-time highs. Still bonds can clearly rally more if the news flow gets worse, as can the US dollar, while equities can certainly fall,” he wrote in a flash note (GREED & fear) to investors on Monday.

Among regions, Morgan Stanley remains overweight on Japan, Korea and Russia. “Upgrade Information Technology (IT) to overweight across Asia/EM with full-set mega-cap preference for first time since end 2017,” Garner wrote.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel