摩根士丹利-亚太地区-股票策略-上调MSCI新兴市场指数目标值8%到1130-2019.3.10-29页.pdf

Jonathan.GLaura.WCorey.NCrystal.NYinan.ZMORGAN STANLEY ASIA LIMITED+Jonathan F GarnerEQUITY STRATEGIST+852 2848-7288Laura WangEQUITY STRATEGIST+852 2848-6853Corey Ng,CFAEQUITY STRATEGIST+852 2848-5523Crystal NgEQUITY STRATEGIST+852 2239-1468Yinan Zhang,Ph.D.QUANTITATIVE ANALYST+852 3963-3507Asia EM Equity StrategyAsia EM Equity Strategy|Asia Pacific Asia PacificRaise MSCI EM Index Target by8%to 1,130Aggressive China stimulus,a longer Fed Pause,positive signsfor US/China trade negotiations and A shares index inclusionlead us to raise our targets for MSCI EM to 1,130(+8%vsspot)and APxJ to 540(+3%).What were doing:We raise our MSCI EM index target for end-2019 from 1,050to 1,130(+8%from current levels)and our MSCI APxJ index target by slightly less(UW Australia)from 520 to 540(+3%from spot).We leave our Topix targetunchanged at 1,800(+12%from spot).For EM,we raise our 2020 EPS forecast toUS$98.4 from US$95.1(consensus is US$99.7)and our Dec 2019 forward P/Efrom 11.0 x(47th percentile)to 11.5x(59th percentile).Reinvigorating the EM rally:We remain OW EM equities in a global context andoutline five key drivers of another push higher:1)we have recently significantlyraised our index target for MSCI China(33%of MSCI EM and 31%of APxJ)by 13%to 93(+14%from spot)and China stimulus was larger than expected(e.g.JanuaryTSF and a direct 3ppt EPS boost from broader VAT cuts,2)positivedevelopments on China/US trade negotiations,3)our house view of the nextFed rate hike has moved from June to December with a lower US real ratesprofile than before(helpful to EM valuations),4)incoming earnings season datawhich are slightly better(in line on revenues)than feared,and 5)clear signs of atrough formed in copper and in formation in Freight indices.Ways to play:Our preferred OW markets are Brazil,China,India,Indonesia andSingapore.We are UW Australia,Mexico and Philippines.We continue to OWFinancials and Materials and selective cyclical areas,such as Chinese Autos whilstwe are UW Telecoms and IT Hardware.Across our coverage,our preferencehierarchy currently is for CSI300,Topix,MSCI EM(country allocation notedabove),with MSCI Asia ex Japan likely to lag,held back by our UW Australia view.We also screen for mega cap stocks with the most upside and downside to MSbottom-up analysts targets.Risks and Catalysts:The global growth and trade environment currently remainsweak(global economic surprise at-26 has not yet inflected)and our TechHardware team have recently warned that the bottom-up environment forsemiconductors continues to deteriorate while KOSPI underperforms EM.Wewill be watching upcoming earnings revisions breadth delta,February and MarchChina TSF and credit data,end-March US/China trade deal details,Brazil pensionreform progress,the busy 2Q election calendar in EM/Aus and whether other EMcan follow Indias lead and begin a rate cutting cycle.Exhibit 1:Upgraded EM and APxJ Index Targets,following China index upgrades on 26th FebruaryDec-19 Dec-20 Dec-19 Dec-2018001800132.3133.3129.0137.012%12%8.0%0.8%5.7%6.2%1130105087.898.488.699.78%1%7.0%12.0%7.9%12.5%54052039.343.239.544.03%-1%3.6%9.9%3.8%11.6%3190031900254127862520277111%11%11.4%9.6%7.9%10.0%1290012900139215451383151513%13%11.6%11.0%9.8%9.5%93936.97.87.18.014%14%13.5%13.1%12.9%14.0%4300430029533031535913%13%12.3%11.5%19.3%14.3%Consensus EPSYoY%MS TargetFwd P/EDec-19(New)Consensus12m FwdP/ECurrentIndexCurrentpriceMSTargetPriceDec-19(New)MSTargetPriceJun-19(Old)MS Top-DownEPS YoY%(New)MSCI APxJ52312.5x12.3xMSCI EM104411.5x11.6xTOPIX160213.5x13.0 xHang Seng2877911.5x11.2xHSCEI*114608.4x8.1xMSCI China8211.9x11.4xCSI300380913.0 x11.7xSource:MSCI,IBES,RIMES,Morgan Stanley Research.Data as of March 07,2019.*HSCEI MS Top-Down EPS includes full impact of Red and P Chip inclusioninto HSCEI while consensus EPS only include partiallyMorgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research.As aresult,investors should be aware that the firm may have aconflict of interest that could affect the objectivity ofMorgan Stanley Research.Investors should considerMorgan Stanley Research as only a single factor in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section,located at the end of thisreport.+=Analysts employed by non-U.S.affiliates are not registered withFINRA,may not be associated persons of the member and may notbe subject to NASD/NYSE restrictions on communications with asubject company,public appearances and trading securities held bya research analyst account.1March 10,2019 06:45 PM GMT 5 Drivers to Reinvigorate the EM RallyExhibit 2 shows our index target history for MSCI EM since initiation in late 2006.This isour second index target upgrade of this cycle.Our first was made at the time of our yearahead outlook piece-2019 Asia EM Equity Outlook:Clouds to Clear(26 Nov 2018)atwhich time we double upgraded EM equities in a global context from UW to OW.Wereiterate that OW call today.EM equities have had a strong start to the year,generating a total return of 8.3%YTD.While MSCI China has delivered 16.2%already YTD,the overall EM index has actuallylagged DM YTD(up 9.8%)giving back some of the significant outperformance at theback end of 2018(see Exhibit 3).This reflects lagging performance in EEMEA(+4.3%YTD),as well as Korea(6.0%)and Taiwan(5.0%).We think this pull back is theproverbial pause that refreshes and argue for 5 drivers of a reinvigorated EM equitiesrally.Exhibit 2:MSCI EM:Index Target History-our second index target upgrade of this cycle3006009001,2001,5001,800Oct-06Oct-07Oct-08Oct-09Oct-10Oct-11Oct-12Oct-13Oct-14Oct-15Oct-16Oct-17Oct-18Oct-19BearBullBaseExtreme Bear Case*MSCI EM Index*Included potential scenario of Eurozone BreakupSource:Factset,Morgan Stanley Research.Data as of March 07,2019.2Looking forward,we see the potential for ongoing investor flows towards EM equities(incrementally boosted by MSCI inclusion factor increases),and the set up for a furtherrally as the impact of China stimulus broadens across the region,while key risks arenavigated(including US/China trade negotiations).1)Upgraded China Market Targets,reinforced by MSCI China up-weightChinese markets have been leading the EM recovery,with the CSI300(26.5%)and HangSeng(13.2%)outperforming MSCI EM(8.3%)year-to-date.We have become even morebullish on Chinese equities through the year,lifting our index targets on 27 February(see China Equity Strategy:More Upside in Sight;Raising China Equity Index PriceTargets).Key reasons for the index target increase are:1)the effectiveness of government policy stimulus has proven to be better than whatthe market had expected,as shown in Jans bank lending and Total Social Financinggrowth,and also in the improvement in Feb Caixin PMI(highest in four months)and neworders/business condition outlook of official PMI;2)MSs strong CNYUSD view:MS macro team recently raised CNYUSD forecast to 6.55from 6.85 for 2019 year-end and to 6.30 from 6.75 for 2020 year-end based onstructural shift of Chinas long-term balance of payment;3)US/China trade talk has been going largely smoothly,raising the likelihood of acomprehensive trade deal to be signed by the two presidents.In addition to the trends above,we also observe signs of investor sentimentExhibit 3:EM equities have pulled back relative to DM markets 2019 YTD after significant outperformance late last year-wethink this is a classic pause that refreshes opportunity to re-engage708090100110120130557085100115130145201420152016201720182019MSCI EM vs DM Total ReturnMSCI EM Total Returns(LHS)MSCI EM vs.DM Performance(RHS)2014=1002014=100Source:Bloomberg,Morgan Stanley Research3improvement,particularly for the onshore space,as suggested by the recent rapidgrowth of new investors registered and the daily trading turnover.MSCI Inclusion:Late last week,MSCI confirmed a 20%inclusion factor vs.current 5%for qualified A-share companies,as we expected.The overall announcement is slightlymore positive:It confirms that qualified ChiNext and China A Mid Cap stocks will also beincluded.A 3-step process is scheduled to ensure the 20%inclusion factor being appliedto all A-share constituents by end of 2019.The inclusion of ChiNext and Mid Cap stockswill bring in up to US$3bn passive flow aside from the US$15bn we have beenhighlighting.In our view,this decision is positive for A-shares given it will more than quadruple A-shares weight in MSCI indices.Weight in MSCI EM will jump from current 0.8%to 3.3%,making A-shares the seventh-largest index market,surpassing Mexico(2.7%),Thailand(2.4%),Indonesia(2.2%).Our Quant strategy team has also developed a market neutralapproach to trading these inclusion events,that performs much better than simplybuying the nominated list(see China Quantitative Strategy:Launching QuantRebalance:Identifying Opportunities from MSCI Lifting China A-shares Inclusion Factor,5 Mar2019).Despite MSCIs announcement on Mar 6th regarding removing/reducing index weight oftwo A-share constituent companies due to foreign ownership cap.issue,we dont thinkthis will derail the positive foreign fund inflow prospect into A-shares this year,as it willbe more driven by active fund managers.Near-term fund flow impact is largelynegligible at US$36mn with Hans Laser removed and Mideas weight halved(for detailsplease refer to China Equity Strategy:Foreign Ownership Cap Incremental Negative forSentiment;However Will Not Derail the Market(8 Mar 2019).Exhibit 4:MSCI China:Index Target History20406080100120Mar-13Sep-13Mar-14Sep-14Mar-15Sep-15Mar-16Sep-16Mar-17Sep-17Mar-18Sep-18Mar-19Sep-19BearBullBaseMSCI China IndexSource:MSCI,Rimes,Morgan Stanley Research.Data as of March 07,2019.42)Further delivery of China stimulus-watching for an EM growth inflectionThis weeks NPC confirmed that Chinese fiscal policy will be loosened through 2019,with two brackets of VAT rates to be cut(from 16%to 13%,and from 10%to 9%),equivalent to Rmb700-800bn of fiscal easing,in our economists view(see ChinaEconomics:2019 NPC:Fiscal Easing Kicks In,5 March 2019).In addition,local governmentspecial bond issuance quotas will be increased by Rmb800bn,for a total fiscal packageof Rmb1.6trn.Monetary conditions are progressively loosening-most evidently in thesharp increase in Januarys credit and total social finance data,although we flag this mayappear weaker in the February data,with our economists noting a Lunar New Yearimpact could see a slight miss to consensus(MSe 11.2%broad credit growth,versus 11.5%expected).Taken together,and looking through the seasonal disruptions,we believe thatcountercyclical easing has moved into full swing to stabilise Chinese GDP growth andthe labour market,with a growth recovery likely to emerge from 2Q19.Exhibit 5:China pro-forma weight in MSCI EM Index:China A-shares will become 3.3%of EM indexby end of 2019Source:MSCI websiteExhibit 6:Estimated annual foreign inflows into A-share equities:US$70-125bn foreign flow into A-shares for 2019;An annualized US$100-220bn therefore by 20270501001502002502004200520062007200820092010201120122013201420152016201720182019E2020E2021E2022EMS Estimated Inflows,High RangeMS Estimated Inflows,Low RangeHistorical inflowsUS$BnSource:CEIC,Morgan Stanley Research estimates5These policy changes will also flow directly into the earnings outlook for MSCI Chinaand APxJ/EM,with the VAT cuts and changes to social security contributions equating toan annualised 3ppt boost to MSCI China earnings growth,which we now see rising 13%in 2019(see China Equity Strategy:VAT,Social Pension Contribution Ratio Cuts:Index/Sector Earnings Implications,Stock Ideas,6 Mar 2019).Exhibit 7:Chinas stimulus should be reflected in wider augmented fiscal deficit and rebound incredit growthSource:CEIC,Morgan Stanley China Economics Research.*This includes funds transferred from Budget Stabilization Fund,Government Funds,and StateCapital Operations,as well as carryover and surplus funds from local governmentsExhibit 8:Chinas Consumer Activity Z-Score showing early improvement after falling sharply in2H18-we expect a significant rebound in Q2 and beyond after recent policy stimulusSource:MSCI,CEIC,Morgan Stanley Research.Consumer activity factor Z-score is monthly data as of December 2018 while MSCI China yoy change as ofFebruary 28,2019.Five factors:1)household loan yoy change;2)consumer confidence index yoy change;3)passenger car sales yoy change;4)airpassenger traffic yoy change;5)retail sales in catering yoy change6Chinas growth recovery is important not just for its own earnings outlook but mattersfor the GDP growth outlook for EM and AxJ.China is a very significant trade destinationfor exports from the rest of the region(see Exhibit 10).Our Asia-ex-Japan economicsteam notes that Chinas stimulus should benefit the region(and world)throughmanufacturing trade,services demand(including tourism),as well as the outlook forresources(see Asia Economics:When Chinas Policy Easing Works,Who Benefits?3 Mar2019).While growth and trade indicators are yet to turn up generally,there are somegreen shoots appearing,including an uptick in the new orders components of FebruarysPMI.Exhibit 9:Impact of VAT cuts on MSCI China earnings,assuming the sector keeps 20-50%of VATcut benefit-should add at least 3%to EPSSource:Bloomberg,MSCI,Morgan Stanley Research.*Calculation is based on companies financial reporting for 2017.We assume that sectors get tokeep 20-50%of direct VAT cut benefit within the industry(the rest goes to up and downstream).73)Copper and the Manufacturing CycleWe remain mindful of the signals from Dr Copper,given its long-term relationship withEM equity returns,particularly when we are looking for a growth inflexion.Sincedropping below US$2.60/lb,prices on the Comex exchange have risen over 10%,to be attheir highest levels since June 2018.Supply disruptions are certainly a factor,just as withthe sharp rally in iron ore(following Vales production cuts after a second damcollapse).However,our commodities team also sees fundamental demand side driversimproving and forecast further upside to USD3.12/lb by end-2019 as Chinas demandimproves from 2Q(see Global Metals&Mining:Copper.The Stars are Aligned,12 Feb2019).If the traditional strong correlation between the copper price and EM equitiesholds,this bodes well for a reinvigorated EM rally.Exhibit 10:Assessing exposure to China stimulus and growth recovery across Asia/EM-Chinasrecovery will act as a growth engine to the rest of the regionSource:CEIC,Morgan Stanley Asia Economics Research8Our global economics team,led by Chetan Ahya,is following the manufacturing cycleclosely,given the disruptions to trade from the staged increases in tariffs in 2018,aswell as to gauge the extent of the US and European slowdowns.They made threeobservations on Februarys data-1)that DM weakness is persisting,but EMs are holdingup;2)that Chinas easing is working,with the first rebound in Chinese new orders in ninemonths(to 50.6)and 3)new