Morgan Stanley: Plot Twist, But No Change in Emerging Markets View
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Morgan Stanley maintains its constructive outlook on emerging markets despite recent macroeconomic shifts. The firm observes that local currency bond yields have not declined as much as falling energy prices would suggest, leaving yields roughly 10-15 basis points elevated relative to historical correlations. This divergence is primarily attributed to rising core US rates, a stronger dollar, and market pricing for EM rate hikes.
However, Morgan Stanley expects these headwinds to dissipate over the next twelve months. The firm anticipates that emerging market central banks will pivot to rate cuts rather than further hikes, while the Federal Reserve is expected to hold steady. Sustained declines in energy prices should bolster risk appetite and support EM currency strength. Consequently, more dovish central bank pricing is projected to drive bond yields lower.
Real spreads have already returned to pre-conflict levels, indicating improving fundamental performance relative to the US. To capitalize on these dynamics, the firm recommends long positions in the South African rand and Hungarian forint, targeting attractive interest rate risk premiums. The strategy emphasizes diversified funding approaches to navigate dollar cycle uncertainty and identify value. Specific trade recommendations include steepeners in South Africa, receiving HUF forwards versus paying PLN forwards, and various FX and rates exposures across Asia and Latin America.
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