August 14, 2025 02:27 PM GMT Investor Presentation | Asia Pacific M Foundation Asia Summer School: Asia EM Equity Strategy The rally in equities from early April looks to be drawing to a close with valuations at all-time highs and downside growth risks evident. The primary trend of US dollar weakness keeps us positioned in Domestic Demand. We run low country risk positions with a focus on Quality at the stock level. Morgan Stanley Asia (Singapore) Pte.+ Jonathan F Garner Equity Strategist Jonathan.Garner@mo ...

Investment Rating - The report indicates a continued expectation of USD weakness, suggesting a favorable environment for US multinational companies, particularly large caps, due to their foreign revenue exposure [5][82]. Core Insights - The report posits that the USD's weakening trend is at an intermission, with a projected net decline of 20% expected [3][8]. - A weaker USD is viewed as a significant, underappreciated tailwind for US equity earnings, especially for large-cap companies that derive a substantial portion of their revenue from foreign markets [5][82]. - The report highlights that the USD remains at the upper end of historical ranges, and pro-cyclicality from hedging and index rebalancing are important amplifying factors [5][7]. Summary by Sections USD Weakness and Economic Implications - The report forecasts that USD weakness will persist, driven by a convergence in US rates to global peers and increased risk premiums from FX hedging [5][6]. - Limited economic impact from recent USD weakness is noted, but further depreciation could push headline CPI and GDP, with an estimated increase of 5 basis points to CPI and GDP for every 1% depreciation [5][63]. FX Hedging and Corporate Exposure - FX hedges significantly impact a company's ultimate USD exposure, but limited disclosures complicate forecasting [5][96]. - The report emphasizes the importance of subjective data from earnings calls to understand corporate currency policies and hedging strategies [44][96]. Sector and Industry Analysis - The report identifies sectors with high foreign revenue exposure, including Tech, Materials, and Industrials, as key beneficiaries of dollar weakness [88][89]. - It highlights that larger companies, such as those in the S&P 500, earn approximately 40% of their revenue abroad, positioning them to benefit more from a weaker dollar [84][82]. Trade Ideas - Specific trade ideas are provided, including maintaining long positions in EUR/USD and short positions in USD/JPY and USD/TRY, reflecting the anticipated continued weakness of the USD [7].

Investment Rating - The report recommends an overweight position in US equities, suggesting they remain attractive compared to the rest of the world [9]. Core Insights - There is a narrative questioning whether foreign investors are fleeing US assets, driven by uncertainties in trade and tariff policies. However, data indicates that while foreign investors have slowed their pace of buying US stocks, they have not significantly reallocated away from them [2][4]. - US risky and risk-free assets are viewed as attractive, with a recommendation for an equal-weight position in global equities while overweighting US equities due to better earnings revision breadth in the US compared to other regions [9]. - The report highlights persistent weakness in the US dollar over the next 12 months, driven by a convergence of US rates and growth to peers, alongside elevated policy uncertainty [10]. Summary by Sections - **Investment Flows**: International investors have been net buyers of US equities post-Liberation Day, but the buying pace has slowed compared to 2024, although it remains higher than in 2021-2023. US investors, in contrast, have been net sellers, reallocating away from US equities [3][4]. - **Bond Funds**: Net inflows to US bond funds have been positive but slower than the previous year. Foreign investors have remained net buyers of US bonds, indicating no significant outflows from US bonds [5][8]. - **Regional Allocation**: The weight of US equities in global equity funds has decreased, reflecting a market correction rather than net outflows. This change aligns with the overall market cap of US equities shrinking as a share of the global equity benchmark index [4].

Equity Market Analysis - US equity markets show positive momentum, contrasting with a different outlook for European investors [1] - The equity market rally appears frothy, with the S&P 500 earnings yield at approximately 425 basis points and the ten-year yield around 428 basis points, resulting in a mildly negative equity risk premium [2] - The current market situation is reminiscent of the period before the dotcom bubble burst in 1999-2000, raising concerns about a potential correction [3] - The market seems to disregard factors like inflation, tariffs, and economic slowdown, focusing solely on rising equity valuations [4] - US stocks are exhibiting exceptionalism, appearing insulated from broader market events [5] - A market correction is anticipated sooner rather than later [6] Currency Market Analysis - The US dollar is trading at a deep discount, with potential for further decline [7] - The Euro is viewed favorably due to its potential to capitalize on US dollar weakness [7] - The ECB is expected to conclude its rate hikes before other major central banks [8] - The Eurozone's current account surplus provides buoyancy to the Euro [9] Gold Market Analysis - Gold is potentially overvalued at $3,300 per ounce [10] - Valuing gold as a deep discount bond suggests a value of around $3,070 per ounce, indicating a risk of correction [11]