Morgan Stanley Sees Possible Market Top for Emerging Asia Stocks

(Bloomberg) -- Asia's emerging-market stock rally may be running out of steam, and earnings expectations are overly bullish.

That's the message from Morgan Stanley strategists who said in a May 2 report that there's a high possibility the end-January level was a “major market top” for the region's equity markets.

Since its January high, the technology share rout, coupled with trade-war bombast and surging U.S. yields have led to selloffs in emerging-market equities globally. The MSCI Emerging-Market Asia Index has lost nearly 10 percent since reaching its record high on Jan. 29.

“Policy tightening in China and the U.S., overly bullish earnings expectations, slowing demand in key sectors like IT and autos and high valuations are the key problems,” strategists including Jonathan Garner wrote in note dated Wednesday. “Our base-case earnings growth forecasts suggest a significant slowing in earnings growth across all regions in 2018.”

This is the global allocation suggested by Morgan Stanley:

• Equal weight - emerging markets and Japan
• Underweight - Asia Pacific excluding Japan (South Korea, Indonesia and Australia)
• Defensive overweight - Association of Southeast Asian Nations (ASEAN)
• Trimmed overweight positions - China, Brazil
• Trimmed underweight positions - Australia, South Korea
• Upgraded South Africa to overweight from equal weight
• Downgraded New Zealand to equal weight from overweight

The company has been systematically reducing exposure to growth and adding back dividend yield and free cash flow yield, it said.

To contact the reporter on this story: Yumi Teso in Bangkok at yteso1@bloomberg.net.

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Divya Balji

©2018 Bloomberg L.P.