Demand for domestic demand and developed market stock exposures has increased in the last three months while appetite for emerging market exposure faded. Morgan Stanley has four trading ideas to take advantage of global investment themes, which seem to be a tad contrarian:
Morgan Stanley has four trading ideas
1. Buy European Exposure: Morgan Stanley
Stocks with high exposure to Europe have been in strong demand globally. Morgan Stanley (NYSE:MS)’s Europe stock baskets have outperformed in the last three months and year to date (as of August 30). The Eurozone exposure basket has outperformed by 8 percent year to date, and the basket is also outperforming the U.S. and the emerging market baskets after five years of lagging such baskets. Despite the recent outperformance, Morgan Stanley (NYSE:MS) analysts believe that there is more upside potential because:
a. Stocks could continue to benefit from improving macroeconomic data.
b. Abatement of sovereign debt concerns, as peripheral bond spreads are now at their tightest levels in two years.
c. Global investors are still underweight the region. For example, U.S. stocks with high European exposure have only recently begun to outperform the S&P 500.
d. Potential for higher return on equity, as Morgan Stanley (NYSE:MS) analysts note that recent return on equity comes out low in both absolute and relative terms compared to five year history. Pricing expectations appear reasonable despite upside earnings revisions and stocks could benefit from improvement in global industrial production.
Source: Morgan Stanley Research
Source: Morgan Stanley Research
2. Buy Chinese exposure: Morgan Stanley
Morgan Stanley’s analysis shows that emerging markets are the least preferred region by investors globally. Morgan Stanley’s emerging market basket underperformed other regions, such as Europe, in the past three months. The emerging market basket lagged Europe by 5.5 percent over the past three months. However, on August, the emerging market basket saw a modest uptick in performance attributable probably to better economic data en China. Morgan Stanley analysts highlighted that their China exposed and China consumer exposed baskets have outperformed over the last three months. The Chinese economic outlook is more positive relative to India, in Morgan Stanley (NYSE:MS)’s view, as India could be exposed to rising interest rates and currency volatility. Pricing expectations for the Chinese basket remain reasonable despite recent increases and return on equity is higher for the Chinese basket relative to the India basket.
Source: Morgan Stanley Research
Source: Morgan Stanley Research
3. Buy Chinese consumer exposure: Morgan Stanley
Outperformance of stocks with Chinese consumer exposure relative to equities exposed to Chinese investments continues to be close to a five year high despite a recent pullback. Morgan Stanley (NYSE:MS) analysts acknowledge that this trade follows the consensus but they recognize that it could still be profitable, as corporations are relying less on debt. Also, the risk of rising interest rates and forced monetary tightening is less in China than in other emerging markets, such as Indonesia, India and Brazil, allowing corporations to reduce debt without causing a recession. In Morgan Stanley’s view, future household consumption in China has been underestimated and such consumption is already driving economic growth and has upside potential that could go above consensus expectations. Finally, Morgan Stanley (NYSE:MS) analysts noted that return on equity on the Chinese consumer exposed basket is higher than return on equity on the Chinese investment exposed basket.
Source: Morgan Stanley Research
4. Caution with UK domestic exposure: Morgan Stanley
U.K. exposed domestic stocks have continued to outperform over the last three months thanks to strong economic data in the U.K. economy. Morgan Stanley analysts believe the U.K. domestic exposed basket offers little upside potential as return on equity is close to a five year high on an absolute and relative basis.
Source: Morgan Stanley Research
