Six lessons from the recent turmoil

There are six important lessons from the recent turmoil that should be used as we set course ahead:

1. The financial economy is still US-centric although the real economy is increasingly multipolar;

2. EM equities retain a high beta to global equities, and that beta can spike in a global risk reduction episode as investors' time horizon shortens. The long-run alpha drivers (superior GDP growth, higher ROE over the cycle) are in our view intact. However, beta storms can disguise this fact;

3. It matters if an investment is owned by a leveraged player even if that investment itself does not have a huge degree of leverage;

4. The Chinese and Russian authorities care about the existence of their stock markets, indicating a commitment to the market economy;

5. At what we believe was the height of the recent crisis, EM rates, spreads and F/X behaved far better than in previous episodes;

6. The Chinese authorities are well willing to underpin growth, including through monetary policy and other easing measures as the economy slows at the margin.

Our stance on the asset class at this juncture remains the same. We continue to believe that EM equities are cheap and oversold and see policy activism in many emerging and developed economies as a potential positive catalyst in the near term.

A retracement in the rates of inflation in many emerging markets provides the extra rationale for a change in policy objective towards underpinning growth. We expect monetary easing to become a pan-EM theme towards the end of the year, probably in an even quicker fashion than currently forecasted by our economists.

(Morgan Stanley -- Jonathan F Garner)