Tuesday , 26 September 2023

Morgan Stanley Has Officially Downgraded U.S. Stocks To A “Sell”! Here’s Why

“Morgan Stanley has long held a bearish outlook on the U.S. but…[they have] officially downgraded U.S. stocks to “sell”, expecting the S&P to end 2019 at 2,750, while double upgrading emerging market to overweight.”

By Lorimer Wilson, editor of munKNEE.com – Your KEY To Making Money! 

[This article of edited excerpts* (848 words) from the original article (1341 words) by Tyler Durden  provides you with a 37% FASTER – and EASIER – read.  Please note: This complete paragraph, and a link back to the original article, must be included in any article re-posting to avoid copyright infringement.]

“…Morgan Stanley strategist Andrew Sheet…

  • expects a sharp slowdown for the U.S. economy,
  • a pick-up in global inflation that will keep monetary tightening intact and
  • urges clients to:
    • get out of credit,
    • load up on emerging markets
    • and stock up on cash.

In short, while 2018 was defined by “rolling bear markets”, 2019 will be the year of “turning”…

Summarizing the bank’s key cross-asset non-consensus…views for the coming year, they are one where

  • the world still faces slower growth, higher inflation, and tighter policy but 2019 should see a turning point in this narrative, specifically in U.S. growth, inflation and policy relative to the rest of the world
  • a turning point in macro coupled with extreme pricing [which] means we expect:
    1. U.S. and European yields to converge.
    2. USD to make a cyclical peak.
    3. EM assets to outperform.
    4. U.S. equities and high yield to underperform and
    5. value to outperform growth…
  • we remain neutral equities (+0%), underweight credit (-5%), neutral government bonds (+1%) and overweight cash (+4%). Within this defensive posture, we are taking larger relative positions, and adding to EM.

…In a nutshell, the bank’s 2019 global macro outlook is that this will be a year in which EMs “retake the lead” as a result of:

  • Global growth slows towards trend
  • US/DMs slow
  • Fed pauses/dollar weakens
  • China easing works
  • Growth differentials move in EMs’ favor

Meanwhile, as the Fed pauses its rate hikes in mid-2019 offering emerging markets a break from the pressure posed by Treasury-yield and dollar gains this year, Sheets predicts that China’s easing measures will finally kick in.

… providing a much-needed boost to EM markets, even as risks are skewed to the downside due to:

  1. US corporate credit;
  2. trade tensions;
  3. continued USD strength and
  4. growing political risks.

While hardly a surprise, Morgan Stanley also notes that 2019 is also the year when QE turns decisively into QT. While the Federal Reserve’s balance sheet has shrunk this year, those of Japan and Europe still grew meaningfully. In 2019, the full G3 central bank balance sheet declines.

As the U.S. economy slows, Morgan Stanley notes that this narrowing of U.S. versus RoW growth differentials leads to a narrowing of policy differentials.

(Click on image to enlarge)

As a result, Morgan Stanley believes that the Federal Reserve will eventually adjust to the weaker growth outlook, pausing after two hikes in March and JuneSheets says that he doesn’t think that a ‘pause’ in the Fed hiking cycle is a boon for U.S. assets, “at least not for now.”

Before pausing, the Fed will likely sound determined to keep tightening policy, given still-easy financial conditions, rising inflation, and a tight job market. As a result, the bank thinks that a major challenge for U.S. assets next year is that they’re ‘boxed in’ as “better-than-expected growth will simply mean more Fed tightening, while weaker-than-expected growth will raise slowdown risks, with limited scope for policy support.”

…Focusing again on the U.S., and what many believes will be the catalyst for the next crisis, namely credit, Morgan Stanley…predicts that underperformance of U.S. growth leading to relatively less tightening from the Fed should drive broad-based USD weakness, especially given its expensive starting point.

This is generally bad news for U.S. stocks, which tend to underperform when the U.S. Dollar weakens.

Even so, don’t expect much more downside to U.S. stocks because as of Q4, U.S. stock valuations now compensate “to a significant degree” for the risks which are out there.

That said, growth stocks remain expensive to value on a worldwide basis.

Commenting on these expected rotations, Morgan Stanley writes that within global equities, it sees a strong case to favor RoW over the U.S., with Japan and EM leading Europe within RoW, while value will outperform growth.

Finally. while the bank sees a 60% probability of its “ditch the U.S.” scenario materializing, it has also forecast bull and bear cases which represent 20% scenarios on either side:

  • Bull case – no growth slowdown: 
    • Growth in Asia and Europe bounces back more strongly after a weak 2018,
    • the U.S. shows signs that rising productivity could extend the cycle greatly.
      • In such a scenario, central banks are able to tighten more aggressively, driven by a desire to reclaim policy tools ahead of the next downturn.
      • Also falling under this scenario is a secondary bull case where growth doesn’t bounce back as strongly, but we overestimate the willingness of central banks, especially the Fed, to tighten policy.
  • Bear case – a US recession: 
    • The bank puts the chance of a U.S. recession at ~20% for 2019 and, while such a recession would be mild, we do not think that it is close to being expected…
      • The largest implication would be for the Fed funds rate, which falls to 0.125% by end-2020 in this scenario. While initially extreme, we think that such a cut is actually quite possible, given that a large deficit means that the U.S. will lack the usual fiscal tools.
        • The result would be much lower yields, a significantly weaker USD and the worst returns for US HY credit since 2008.”
(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)

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