Asia EM Equity Strategy Remain EW on IT and OW Consumer Sta...-110327792

M IdeaAsia EM Equity Strategy | Asia PacificRemain EW on IT and OW Consumer StaplesMorgan Stanley Asia (Singapore) Pte.+Jonathan F GarnerEquity Strategist Jonathan.Garner@morganstanley.com +65 6834-8172 Daniel K BlakeEquity Strategist Daniel.Blake@morganstanley.com +65 6834-6597 Kristal JiEquity Strategist Kristal.Ji@morganstanley.com +65 6834-6949 Morgan Stanley Asia Limited+Jason Ng, CFAQuantitative Strategist Jason.Dl.Ng@morganstanley.com +852 2848-8845 Nicola MakQUANTITATIVE STRATEGIST Nicola.HY.Mak@morganstanley.com +852 3963-0368 Crystal NgEquity Strategist Crystal.Ng@morganstanley.com +852 2239-1468 We think there is increasing client awareness of the issues we raised in our July note that recommended a switch out of IT and into Staples. We think it is too soon to turn more constructive on IT despite recent underperformance and lower valuations. - The EM IT sector peaked on 11 July and has fallen 15% in the past two months. At the same time, EM Consumer Staples has been flat, while the overall EM index is down ~6%. - We think the market will remain cautious on the global growth outlook and note the market's ongoing debate about the extent of upcoming Fed rate cuts (25bps versus 50bps). In this context, we remind clients that IT underperformance and Staples outperformance has typically persisted for at least 6 months after the beginning of a Fed cutting cycle. - On a forward P/E basis EM IT is now back in line with long-run average valuations - due to price declines and continued analyst upward estimates revisions - trading on ~15x +12m P/E on consensus. However, typically for a trough to form it needs to trade one SD cheap on this metric. - We also caution that on our preferred P/Sales metric, key names such as TSMC have adjusted only marginally thus far versus prior valuation cycles. Typically, once IT has peaked in absolute and relative terms IT takes around a year before it begins to outperform again. Moreover, investor positioning remains OW versus benchmark on the sector, albeit less so than two months ago. For details see our July note: Asia EM Equity Strategy: Correction: Shifting Risk-Reward – Take Profits on IT, Upgrade Consumer Staples to OW (24 Jul 2024).Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to FINRA restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Se