Morgan Stanley Sees ‘Uncomfortable’ Rally in Emerging Markets

Morgan Stanley anticipates a continued, albeit tempered, rally in emerging market assets through year-end, driven by positive momentum but constrained by a decelerating global economy and uncertainties surrounding US policy. While projecting a modest appreciation of developing currencies against the dollar, the bank suggests they may underperform certain G-10 currencies, despite a strong year-to-date performance where emerging-market currencies have gained over 5%.

Analysis

Morgan Stanley projects a continued, albeit 'uncomfortable,' rally in emerging-market assets through the remainder of the year, with gains anticipated to be constrained by a decelerating global economic environment and uncertainty surrounding US policy. The bank forecasts a modest appreciation of developing nation currencies against the US dollar by year-end, although these are expected to lag some G-10 currencies. This outlook follows a strong performance, with a key gauge of emerging-market currencies having appreciated by over 5% year-to-date through May, marking its best start to a year since 2017. The analysis suggests that while momentum supports further gains, macroeconomic headwinds and policy ambiguity present significant limitations to the upside potential for these assets.

Key Decisions for Investors

• Investors should consider maintaining exposure to emerging-market assets to capture potential continued rallying, but temper expectations for substantial gains due to identified global economic slowdown and US policy uncertainties.
• Monitor leading global economic indicators and US policy announcements closely, as these are pinpointed as key determinants for the performance trajectory of emerging-market assets and currencies.
• Evaluate relative value opportunities within currency markets, as emerging-market currencies are projected to appreciate modestly against the dollar but may underperform select G-10 currencies.