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Morgan Stanley says emerging markets investors are set for strong gains

Key Points
  • Morgan Stanley predicted in a report on Monday that emerging markets could be set for a rally, and raised the target for the MSCI Emerging Markets Index by 8 percent for the end of 2019.
  • The investment bank said the index could rally due to a few factors, including its bullish outlook for Chinese stocks, upcoming stimulus for China, and the price of copper.
HANGZHOU, CHINA - AUGUST 07: An investor watches the electronic board at a stock exchange hall on August 7, 2018 in Hangzhou, Zhejiang Province of China. Chinese shares rebounded on Tuesday, with the benchmark Shanghai Composite Index rose 74.21 points, or 2.74 percent, to close at 2,779.37. The Shenzhen Component Index rose 251.19 points, or 2.98 percent, to 8,674.03.
VCG | Visual China Group | Getty Images

A global benchmark for emerging markets is set to surge as much as 8 percent this year, according to Morgan Stanley.

The investment bank said in a Monday report that the MSCI Emerging Markets Index is likely to be driven higher by additional stimulus from Beijing and bullishness on Chinese shares, among other factors. Chinese stocks make up 32.12 percent of the index.

So far this year, the CSI 300 — an index of the largest stocks traded on the mainland — as well as Hong Kong's Hang Seng Index, have outperformed MSCI's emerging markets index.

Morgan Stanley said in a note Monday that it has "become even more bullish on Chinese equities through the year," with those stocks leading the charge in the recovery among emerging markets in 2019.

The increasing likelihood of a trade deal between the U.S. and China has also brightened the outlook, Morgan Stanley said.

In addition, the effectiveness of China's recent raft of stimulus measures has "proven to be better than what the market had expected," the report said. Morgan Stanley pointed to the record-high numbers for bank loans issuance and total social financing — a broad measure of credit and liquidity in the economy — in January.

Experts have said those developments reflect pressure from authorities to increase credit as Beijing seeks to boost its slowing economy.

Possible regional growth

Last week, Beijing announced new measures to strengthen growth in the country through tax cuts and more.

Morgan Stanley said that announcement showed the country's easing measures have "moved into full swing" and are set to stabilize China's economic growth and labor market. That would point to a faster rate of growth for the world's second-largest economy from the second quarter of 2019, it added.

In fact, other emerging countries could gain from Beijing's stimulus, the U.S. bank said.

"China's stimulus should benefit the region (and world) through manufacturing trade, services demand (including tourism), as well as the outlook for resources," the report said.

Morgan Stanley said investors who want to ride the rally should look at China, India, Indonesia, Singapore and Brazil.

Other reasons for a more rosy emerging markets outlook include better-than-expected corporate earnings in the region, said the bank.

Dr. Copper

The report also pointed to the performance of the price of copper — often viewed as a leading indicator of economic health because of its widespread use in various sectors.

Copper prices have risen over 10 percent to their highest levels since June 2018, the bank pointed out.

"We remain mindful of the signals from Dr Copper, given its long-term relationship with (emerging markets) equity returns, particularly when we are looking for a growth (inflection)," it said.

While supply disruptions have been a factor in that price surge, Morgan Stanley predicted that demand will go up, particularly from China in coming quarters.

"If the traditional strong correlation between the copper price and EM equities holds, this bodes well for a reinvigorated EM rally," the report said.