De-escalation rotations have further to run, Morgan Stanley says

Investing.com -- Morgan Stanley believes the rotation trade following the US-Iran memorandum of understanding has further room to run, as the bank identified stocks across EEMEA markets that remain dislocated from their pre-conflict levels.

Analyst Matthew Nguyen told investors in a note on Tuesday that banks across the UAE, South Africa, Hungary and Turkey, along with UAE real estate, have been the primary beneficiaries of the de-escalation trade, while energy and chemicals have generally lagged "as lower geopolitical risk reduced the appeal of oil-linked sectors."

With the initial momentum fading, Morgan Stanley said it revisited winners and laggards to distinguish "tactical catch-up opportunities" from "continued laggards."

South Africa was flagged as offering the most compelling catch-up opportunities. Morgan Stanley noted that precious metals have come under renewed pressure on a more hawkish perceived Fed path, creating scope for a tactical rebound in gold and platinum group metals miners, with the bank continuing to prefer gold over PGMs.

UAE equities have recovered meaningfully but "have retraced less than half of their conflict-driven decline," according to Morgan Stanley, which said it continues to prefer Abu Dhabi over Dubai given stronger sovereign support and greater energy exposure.

Turkish banks have also recovered, though Nguyen said further upside will increasingly depend on sustained confidence in the disinflation process. The bank's CEEMEA economists expect Turkey's rate-cutting cycle to resume only in the fourth quarter of 2026.

Saudi energy and chemicals names, including Yansab, Saudi Kayan and Petro Rabigh, remain above pre-conflict levels, which Morgan Stanley characterized as tactical underperformance rather than structural.

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