US Stocks Are Not The Best Place To Put Your Money, Enter Emerging Market Stocks

Throughout the year, emerging market stocks have not been exactly successful – however, it is very likely that things will change in 2019, said Morgan Stanley in its Global Strategy Outlook report for 2019.

And owed to this expected change, the investment banks finds it more beneficial to own emerging market stocks other than stocks in the U.S. in the coming year. Morgan Stanley went further to say that it moved emerging market stocks from “underweight” to “overweight” in 2019, and at the same time, they moved U.S. stocks down to “underweight.”

The bank said in a publication which was released on 25th Nov. that they feel like the bear market almost complete for emerging markets. This means that they expect emerging market stocks to rise soon. “We are taking larger relative positions and adding to EM,” they said.

A lot of investors opted out of emerging markets in 2018, with some liquidating their emerging market stocks and buying more assets in the U.S. because of a sudden rise in bond yields and the appreciating greenback, while countries like Turkey and Argentina faced huge financial troubles. Therefore, investors sold off their emerging market stocks as well as other holdings.

Consequently, the MSCI Emerging Markets Index, which evaluates stocks in 24 different economies plummeted at about 16 percent this year. However, in Morgan Stanley’s base scenario, they think it will rise 8 percent from its present state – surpassing 4 percent, which is the forecast of both S&P 500 and the MSCI Europe Index.

Morgan Stanley finds emerging market stocks more preferable to stocks in the U.S. market, and this is owed to its forecast which predicts a steady growth in these economies in 2019, as opposed to a slowing expansion stateside.

The bank also predicts a fall in the growth of U.S. market from 2.9 percent estimates this year to 2.3 percent in the coming year, 2019 and then 1.9 percent in 2020. If this slowdown eventually happens, the greenback would probably be affected, which will also release the pressure on emerging markets whose debts are denominated in the U.S. dollar.

Additionally, Morgan Stanley predicts a slight slowdown in growth throughout emerging markets from 4.8 percent this year, to 4.8 percent in 2019, after which it will rise to 4.8 percent in 2020.

Where to put your money in 2019

Morgan Stanley singled out its main “overnight” countries to include Brazil, Thailand, Indonesia, India, Peru and Poland. The bank is “underweight” Mexico, the Philippines, Colombia, Greece and the United Arab Emirates.

Also, the bank would opt for what’s referred to as “value stocks” as against “growth stocks” globally. Value stocks describes companies that trade at prices below people’s expectations, while growth stocks refers to firms that looks like they have the capacity to develop into something bigger.

Long term investors can’t afford not to own emerging market stocks: Strategist  

“We find that value stocks are concentrated in financials, materials, energy and utilities (in that order),” said Morgan Stanley.  In addition to this, the bank expressed an overnight stance on the aforementioned sectors, and “a negative sector bias in tech, healthcare and consumer.”

The bank also pointed out another investment idea, which was an overweight in metals and mining firms, currently “experiencing secular support for its earnings power.”

‘Three overarching headwinds’

Regardless of the potential in stocks, and the great possibility for high returns, particularly in emerging market stocks, Morgan Stanley said it is not so enthusiastic about it.

The bank expressed a rather neutral position on its asset class for 2019, as well as government bonds, underweight on credit and overweight on cash.

They further mentioned “three overarching headwinds” which put a ceiling on their overall interest in equities. With the first being downside risks to global growth in 2019 which it referred to as “predominant,” second was the fall in the potential growth of company earnings all over the world, particularly in China and Europe.

Lastly, they stated that due to increasing wages and financing costs, companies would most likely experience pressures – which would put a ceiling in their earnings-per-share.