Morgan Stanley Turns ‘Outright Bullish’ on Asian Growth Stocks

Easing financial conditions globally have made Morgan Stanley “outright bullish” on growth stocks in Asia and emerging markets versus their value peers.

Liquidity injections into the US and European financial systems, China’s surprise cut to its reserve requirement ratio on Friday and down-trending US interest rates imply “tailwinds are now returning to the segment,” the quantitative strategy team including Gilbert Wong wrote in a note Sunday.

“Low quality and unprofitable growth could tactically outperform to ride the wave of sentiment recovery and hedges unwinding,” they said. “Liquidity is on our side” and market volatility and bond yields are starting to moderate, they added.

The team had reiterated a neutral stance on Asian growth shares in February. An MSCI measure of growth names fell almost 7% in its worst monthly performance since September, lagging behind its value counterpart. The growth gauge has added 0.7% so far in March while its value peer has fallen.

Failures of US and European lenders have caused a repricing of interest rate expectations, with foreign investors dumping emerging Asia excluding China stocks for a fourth straight week through March 18.

Picking a side in the growth versus value debate has been tough in recent months, with each of the investment approaches taking turns to lag behind in Asia, as uncertainty over the path of US monetary policy and the strength of the global economy made one-way bets hard.

As the dollar eases in such an environment, Morgan Stanley favors Japan’s growth stocks as the yen strengthens. “Rate derivatives indicate a maturing expectation of YCC exit, and FX options are now pricing toward a normalizing macro outlook,” which should also cause growth to outperform, they said, referring to the country’s yield curve control policy.

In a separate note dated Friday, the bank’s strategists said they prefer early-cycle sectors such as semiconductors, hardware and consumer discretionary — particularly in China, South Korea and Taiwan — as rapid liquidity injections cap the dollar and lower real rates.

That stands in contrast to Goldman Sachs Group Inc.’s view, which sees Korea, Taiwan and Asian tech shares as vulnerable amid the US banking sector stress given their rallies in early 2023.

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