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SINGAPORE: Morgan Stanley said on Thursday there is still further upside for emerging markets, despite the strong showing in recent weeks.
It projected the MSCI Emerging Markets Index to trade at a price target of 1,200 by end-2010 – a 28 per cent increase from current levels.
Equities in emerging markets have been volatile in the last 24 months as the global recession caused major swings in valuations.
Morgan Stanley said during this period, the MSCI EM Index surged to the 1,300 level, before dropping to below 500, and then recovering to 900.
Looking ahead, it said stronger earnings growth forecasts will drive increases in the target prices of the MSCI EM Index at the end of 2010.
It has revised estimates of earnings recovery to about 40 per cent, compared to earlier estimates of some 28 per cent. But experts said the year ahead could still be bumpy for a number of reasons.
Jonathan Garner, chief Asian & emerging market equity strategist at Morgan Stanley, said the withdrawal of policy accommodation is beginning to hike interest rates and oil prices, which are both headwinds for Asian equities, and will probably prompt some sector rotation in the market.
Experts believe investors can profitably take risks at the sector level. Morgan Stanley said the sectors that are likely to do well include energy, financials, real estate and consumer discretionary in fast-growing economies like Brazil, India, China and Indonesia.
China, given its superior economic performance is a top pick. For next year, Morgan Stanley expects a 20 per cent upside for MSCI China and just under 10 per cent climb for the Hong Kong local market.
Jerry Lou, market strategist, China, Morgan Stanley, said: "In terms of the domestic A-share market, things could look quite difficult in the coming quarter because of a lot of these new investments competing for liquidity.
"But we think within the next 6 months to 12 months, the market will also be very strong. We are looking at more than 20 per cent upside from here as well."
However, the outlook is less bullish for developed Western markets. While they are not likely to revisit previous lows, Morgan Stanley expects a 20 per cent decline in the next quarter or so.
- CNA/so
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