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In a recent report, renowned foreign brokerage firm Morgan Stanley (NYSE:MS) has articulated its preference for Japanese and Indian equities over the broader emerging markets (EM) and China for the current year. The MSCI EM index has faced challenges with a year-to-date performance of -6.1%, following lackluster absolute and relative results in 2023.
Within the EM landscape, the top-performing nations include Turkey, Egypt, and Colombia, while Korea, Chile, and Hong Kong find themselves at the bottom of the performance spectrum. Notably, all EM sectors have reported negative absolute returns year-to-date. The report highlights Materials, Real Estate, and Consumer Discretionary as the weakest performers, with Energy, Utilities, and Financials emerging as the top three.
Japan has kicked off 2024 on a strong note, with the TOPIX index gaining +5.3% year-to-date (in JPY terms or +0.2% in US$) as of January 18. This robust performance is attributed to strong nominal GDP growth, positive earnings revisions, and a structural trend towards rising Return on Equity (ROE). Morgan Stanley considers Japan a key overweigh (OW) market at the global equity level, setting a TOPIX base-case target price of 2600 (+4% upside) and noting a rising likelihood of their bull case target of 2800 (+12% upside) coming into play. The surge in fund re-allocations to Japan year-to-date has been a driving force behind multiple expansion.
Japan’s resilience is evident in its outperformance compared to the overall EM, with a notable +5.3% gain in JPY or 0.2% in US$, in stark contrast to the -6.1% decline for MSCI EM in US$. The report identifies the bottom six worst-performing markets year-to-date as Korea, Chile, Hong Kong, South Africa, Poland, and China. Conversely, the top six best-performing markets include Turkey, Egypt, Colombia, Hungary, Greece, and Saudi Arabia, showcasing the dynamic landscape within the emerging markets.
Morgan Stanley’s strategic insights position Japan and India as attractive investment destinations, providing a nuanced perspective amidst the challenges faced by the broader emerging markets.
