Morgan Stanley anticipates that the upcoming US election could pose a downside risk to Asian and emerging markets, advising a defensive position by reducing stock exposure. Historically, except for 2020 when the pandemic played a significant role, election years have brought considerable returns to these markets. However, due to currently high market valuations, caution is recommended as the election approaches.
This year, global stock markets have seen substantial gains amid a cycle of loose monetary policies from central banks worldwide. The MSCI Asia Pacific Index has reached near historical highs. Morgan Stanley notes that Asian and emerging market equities have achieved their best performance since 2001, with significant contributions from Japan's TOPIX, South Korea's KOSPI, and Taiwan's Weighted Index. The MSCI China Index has also rebounded from last year's stagnation. Despite these gains, the firm foresees potential volatility as the US election nears.
According to Morgan Stanley's data, stock markets in countries like India, Mexico, and South Africa experience increased volatility, rising three to six times around election days. Similar volatility is expected for Asian markets during the US election period. The recommendation is to shift focus towards more local and defensive markets, industries, and companies. The firm suggests maintaining an "overweight" position in India, ASEAN countries, and South Africa, with a preference for consumer staples, utilities, and telecommunications sectors.
