What's in the Price - Asia/EM Equities (Morgan Stanley)
In a short note published overnight, Jonathan Garner provides an update on current valuation levels for Asia/EM equities (see attached for client approved note).
Takeaways as follows:
- The current MSCI EM forward PE of 9.4x has occurred only 10% of the time over a 20-year history on a monthly basis. Average returns 12 months after hitting this valuation level are +51.0% with a hit ratio of 100%. Average returns 1, 3 and 6 months after hitting this valuation level are 0.4%, 10.1% and 26.2% with hit ratios of 56.5 %, 78.3 %, and 91.3 % respectively.
- MSCI EM cumulative 50 day return is -9.3%, a 1 standard deviation event. Average 12m returns after hitting this level are +30.2% with a hit ratio of 75%.
- Technicals: Oversold levels suggests positive returns 6-12 months out. MSCI EM current cumulative 50 days return is about -9.3%, which is a -1 standard deviation event. Average returns 1, 3, 6 and 12 months after hitting this valuation level are 2.5%, 3.0%, 14.4% and 30.2% with hit ratios of 64.0%, 58.0%, 64.0% and 74.7%, respectively.
- Target Scenarios: Garner’s MSCI EM 2011 bear case target of 940 is 10% below current levels. His bear case entails a combination of Chinese hard landing, US double dip, and acceleration of Eurozone sovereign debt crisis. His scenario-weighted price target of 1305 has 30% upside from current levels.
- Sticking with country preferences – OW China, Russia, Brazil, Korea, and Malaysia. In a bear case scenario, however, China and Malaysia are most likely to be defensive.
Sector Preference: He remains OW Energy, Materials and Financials. However, should the environment develop into a bear case scenario oriented to DM growth disappointment, he would suggest maintaining a portfolio skewed to domestic demand (financials, telecoms and consumer staples and discretionary).