Morgan Stanley Clients Push Back on its Emerging-Market Call

(Bloomberg) -- Morgan Stanley is optimistic on emerging-market bonds looking ahead to 2019. Some of its clients less so.

“We’ve spent the last two weeks discussing our year-ahead outlook with investors. We received pushback on our constructive view on EM fixed income,” Morgan Stanley strategists including James Lord wrote in a note on Monday. “Chief among concerns is the global growth outlook and EM’s ability to withstand a downturn. With the U.S. and Europe slowing, investors see China as a significant risk.”

After tumbling for much of 2018, emerging markets have had a better time this quarter, helped in part by a shifting outlook for the Federal Reserve. With prospects for a pause in interest-rate hikes in the coming months, the dollar’s appreciation has petered out, as has the climb in Treasury yields. That’s reduced pressure on developing nations that had seen increased capital flight -- sending their currencies lower and in some cases spurring local rate rises that cast a shadow over growth. The trade-war cease-fire may also bode well.

As the Fed itself gets more explicit in tilting away from tightening, “we’d expect EM to benefit,” the Morgan Stanley strategists wrote. “We are reassured that there are already clear signs of the Fed adjusting its stance, moving away from autopilot on rate hikes to data dependency.”

The team highlighted the importance of next week’s Fed meeting, with its updated projections among central bank officials for the rate path for 2019 and beyond.

Morgan Stanley isn’t alone in seeing a better year for emerging markets in 2019. Goldman Sachs Group Inc. strategists expect “modest positive returns across the major EM indices next year, with the most absolute upside in equities, but the highest Sharpe ratios in local bonds (particularly high-yielders),” they wrote in a note Tuesday. Sharpe ratios measure returns adjusted for volatility.

To contact the reporter on this story: Christopher Anstey in Tokyo at canstey@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Tomoko Yamazaki, Eric Lam

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