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All our coverage markets fell heavily in October, but EM did not underperform DM, and hence did not take out the erformance relative low from Jan-16, which still stands. This is potentially bullish, but we continue to prefer Japan to EM as after the early November bounce, there is upside to our Topix target of 1,720 (+5%), but downside to our EM target of 945 (-5%). We also stay EW MSCI China (Target is 73 or -1%) vs. EM with selective exposure to A shares.
Consensus earnings estimates globally are now in the process of being adjusted substantially lower, particularly for Autos and IT, the two areas that have most concerned us this year. This is a shift that typically coincides with the latter phases of a bear market. However, our top-down EPS estimate is still 15% below consensus for EM for 2020 and 7% below for Japan. Global growth indicators have softened markedly in the last two months, with downside surprises in the China PMI for Manufacturing, Services and Exports notable.
In response, China's easing cycle is moving into full gear and targeting fiscal support of the consumer. We are also closely monitoring China/US trade tensions, the USD and Fed Fund futures as additional guides to future performance. Although President Trump has recently signaled willingness to do a deal with President Xi at the G20, there are still significant differences between the two sides in relation to Chinese IP protection and industrial policy.
We continue to recommend cross-asset investors to prefer EM $ sovereign debt to equities, although relative valuations are far less extreme than when we first recommended this in June. In terms of style, we continue to UW Growth and OW
Value and Dividend Yield in EM/APxJ and Japan. Our country OWs are: Thailand, India, Brazil, Indonesia, Poland and Taiwan. Our UWs are Colombia, Greece, Turkey, Philippines, Korea and Mexico. We have recently taken our OW on Energy down considerably and raised our stance on Materials, which is now our largest OW alongside Financials and added Chinese materials stocks back to our focus lists.
20181106-Morgan Stanley-Asia EM Equity Strategy Almanac：Garner Alpha，Finally a.pdf
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