Morgan Stanley said it expected a better year ahead for Southeast Asia’s equity markets, but that didn’t stop it from downgrading Malaysia to Underweight.
“We see a better year ahead with expected U.S. dollar weakness helping to offset further U.S. Fed tightening and global trade tensions,” the investment bank said in a note dated Monday.
But it added that Malaysia tends to underperform in a rising emerging markets trend, leading to the cut to Underweight from Equalweight.
“Falling oil prices are a headwind with the budget being set at US$70/bbl. We see further earnings risk for Malaysia as fiscal consolidation bites with cancellation of infrastructure projects and rationalization of expenditure,” the bank said.
It forecast Malaysia equity earnings would rise just 3 percent in 2019.
The MSCI Malaysia is also trading at a 46 percent premium to the MSCI Emerging Markets index, compared with a long-term average of 32 percent, it said.
It cut its MSCI Malaysia target to 568 from 610.
Top pick Indonesia
It tipped Indonesia as its most preferred market as a weaker U.S. dollar improve returns for U.S. dollar foreign investors and lead to a more dovish Bank Indonesia. It added that the recent around 30 percent correction in oil prices would also improve the country’s current account.
Better consumption heading into the April presidential elections should mean earnings growth will hit a trough in the first quarter and then accelerate to 14 percent by year end, the bank said.
“We also believe the market will continue to reward the proactiveness – 175 basis points of rate hikes so far along with import curbs – of policy makers through 2018’s global headwinds,” it said.
It raised its MSCI Indonesia target to 7711 from 6906.
Singapore equities’ valuation warrants an Overweight, Morgan Stanley said, adding that stocks are at 11.5 times price-to-earnings on a next 12 months (NTM) basis.
“Singapore equities have been this cheap only five times before over the last 30 years,” it said.
It noted that while previously valuations have fallen this low when NTM earnings growth fell to 5 percent or less, not far off the bank’s current 2019 earnings growth forecast of just 6 percent, that was off an “extremely strong” 2018.
It lowered its MSCI Singapore target to 1741 from 1842.
Morgan Stanley rated Thailand at Overweight, pointing to expectations that consumption would rebound in the first half of next year on exports and elections which are expected in February.
“For exports,higher capacity utilization rates – already 90 percent for autos and chemicals – will help wage growth. Stimulus around February 2019 elections will also help sustain consumer sentiment,” it said.
It raised its MSCI Thailand target to 614 from 607.
It remained Underweight on the Philippines on expectations a sharp rise in domestic funding costs, which are up more than 300 basis points over the past year, and slowing economic growth will weigh on earnings and equity valuations in the coming year.
“A growing trade deficit is pressuring the balance of payments,and consensus GDP growth expectations of 6.5 percent look too optimistic against a backdrop of tighter monetary policy,” it said.
“We would sell into any near-term strength from expectations of peaking inflation,” Morgan Stanley said of the Philippines.
It raised its MSCI Philippines target to 1200 from 1129.