After last year's rout, emerging markets have charged ahead recently, but Morgan Stanley expects the rally will run out of steam as soon as earnings season strikes.
"Don't chase the rally," Morgan Stanley said in a note dated Wednesday. "We don't see top-down or bottom-up catalysts." It noted the MSCI Emerging Markets index's around 10 percent rally since early February means it's now nearing its 12-month target of 1050. The index ended at 1009.22 on Thursday.
"The catalyst for the rally has been the ending of an unprecedented period of fund outflows from the asset class (22 weeks, 7 percent of assets under management) rather than an improvement in fundamentals," it said, although it noted some "idiosyncratic" positives such as the improvement in India's current account position.
Over the three weeks to April 9, around $4.8 billion has flowed into emerging market equity funds, while the segment's bond funds have seen around $2.85 billion in inflows over the two weeks to April 9, according to data from Jefferies