Besides Morgan Stanley, most economists have been revising their forecasts downward for global growth as Covid-19 pandemic stalled economic activity across the globe. Over the past few weeks, analysts at Goldman Sachs, Nomura and Moody’s have cautioned against the economic fallout of the pandemic and sharply revised their GDP
forecasts. In the Indian context, the projection of an economic contraction of 5.2 per cent in GDP
(earlier contraction forecast of 0.5 per cent) for financial year 2020-21 (FY21) has been the sharpest amongst the lot.
Inflation, according to the Morgan Stanley report, is expected to rise globally (G4 + BRIC), though India should be able to contain it at 4 per cent in 2020 and 2021. At the global level, Morgan Stanley’s forecast stands at 1.7 per cent for 2020 and at 2.1 per cent for 2021e.
As a base case, Morgan Stanley expects the MSCI Emerging Market index (MSCI EM) to dip 12 per cent to 800 mark from its current level of 912 by December 2020. The bull-case scenario pegs this index at 1,050 – up 15 per cent from the current levels and at 650 levels – a drop of 29 per cent from the current levels.
That said, garner believes the markets
will unlikely be able to sustain the recovery from recent lows. ICICI Bank and TCS are the two Indian stocks on Morgan Stanley’s Asia Pacific ex Japan Focus List, which it labels as high conviction ideas to own.
“We think bottom-up analysts are only halfway through adjusting to this reality. With estimates likely to fall further – particularly in non-IT cyclicals – and valuations somewhat rich, we think markets
are unlikely to sustain the recent rapid recovery. Markets
that show either rising corporate leverage into 2020 or relatively lower funding strength scores include Argentina, Colombia, South Africa, Turkey and Thailand,” he wrote.
Among EMs, Garner expects China and Japan to continue their secular outperformance going ahead. Both markets have materially outperformed EM year-to-date (YTD), Garner says, and do have idiosyncratic risks (US/China trade tensions resurgence, Japan's relatively adverse Covid-19 experience and sector skew to old-economy cyclicals), but secular drivers of their outperformance are intact.
"We are neutral Value versus Growth to balance the risk of valuation premia erosion against the fact there is no clear near-term catalyst for reversal. Meanwhile, we prefer Quality given funding risks and the importance of sustainable competitive advantage given unprecedented macro-economic volatility," he said.