Southeast Asian stocks were among the best performers in Asia last year, with markets in Indonesia and Thailand rising around 40 percent. Morgan Stanley had previously forecast gains of 13 percent, 3 percent and 22 percent for the MSCI indexes of Indonesia, Thailand and Singapore respectively.
But in a new report, Morgan Stanley says stocks in Indonesia and Thailand are likely to rise only 1 and 2 percent respectively from current levels, while stocks in Singapore could actually fall by 5 percent.
The reason: the bank has cut its GDP growth forecast for all three economies as well as earnings per share.
The bank isn't, however, predicting a major selloff or meltdown for the region's stock markets because it points out the region is now less reliant on exports to Europe and the U.S.
According to the report, the U.S. and EU accounted for 20.1 percent, 22 percent and 16.6 percent of total exports to Indonesia, Thailand and Singapore, respectively in the first quarter of this year, compared with 28 percent, 37 percent and 31.9 percent in 2000.
Within the region, the bank points out that Singapore remains the most exposed to a slowdown in the West.
"Singapore’s domestic demand is closely linked to external demand; hence, its domestic demand has been quite volatile," the bank's analysts wrote.
On the other hand, Indonesia's domestic demand was likely to be the most resilient, according to the report.