Stocks in emerging markets have had a rough year but are tipped for a turnaround, according to Morgan Stanley, which predicts stable growth in those economies in 2019.

The investment bank has upgraded emerging market stocks from “underweight” to “overweight” for the new year, while US equities were downgraded to “underweight.”

“We think the bear market is mostly complete for EM (emerging markets),” the bank said in its Global Strategy Outlook report for 2019, adding: “We are taking larger relative positions and adding to EM.”

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Many investors withdrew from emerging markets throughout 2018 and bought more assets in the US due to a spike in bond yields. That will change, says Morgan Stanley, explaining that emerging markets will outperform developed markets.

Within the emerging markets space, Morgan Stanley’s key “overweight” countries are Brazil, Thailand, Indonesia, India, Peru and Poland. The bank classes Mexico, the Philippines, Colombia, Greece and the United Arab Emirates as “underweight.”

The investment bank sees an upside of eight percent for MSCI Emerging Markets Index (which measures stocks in 24 economies) in 2019. Under the bank’s base scenario, the index will outperform the four percent rise forecast for both the S&P 500 and MSCI Europe Index.

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Growth across EM has been forecast to slow slightly from 4.8 percent to 4.7 percent in 2019, before inching back up to 4.8 percent in 2020. US growth will moderate from the 2.9 percent estimates to 2.3 percent in 2019 and 1.9 percent in 2020, Morgan Stanley said.

“A major challenge for US assets next year is that they’re ‘boxed in’ – better-than-expected growth will simply mean more Fed tightening, while weaker-than-expected growth will raise slowdown risks, with limited scope for policy support,” its strategists wrote. “In a major change from the last 10 years, both good news and bad news creates problems for US markets.”

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