How to play the crowded long unwind in Asian stocks: Morgan Stanley

Investing.com-- Morgan Stanley (NYSE:MS) said that Asian stocks were likely to recoup about 40% to 60% of their early-August losses in the next two months, after a severe reversal in risk appetite and an unwinding carry trade battered Asian markets.

Asian markets saw a broader unwinding in long positions through early-August, with Japan bearing the brunt of the crowd long unwind. The move was less severe in Asian stocks excluding Japan.

Japanese stocks were battered by hawkish signals from the Bank of Japan and a strengthening yen, which saw the Nikkei 225 plummet into a bear market.

MS expects a divergence between Asia stocks ex-Japan and Japanese stocks after an initial recovery. Japanese stocks in particular had already recouped most of their early-August losses, and are expected to remain rangebound in the coming month, MS said. 

MS said quality stocks remained favorable, and recommended “tactically long stocks” with strong 12 months to one-month momentum. The brokerage recommended that investors remained neutral between growth and value stocks in Asia and Japan in the coming months.

MS expects the fourth quarter of 2024 to mark an inflection point for growth over value stocks, especially after interest rate cuts in the U.S. and heightened expectations for more cuts in 2025. 

The brokerage expects a soft landing for the global economy, and expects the Federal Reserve to begin cutting rates by 25 basis points every meeting until mid-2025.