Morgan Stanley Breaks Consensus, Downgrades US Stocks To Sell -

Morgan Stanley Breaks Consensus, Downgrades US Stocks To Sell

Nov 26, 2018Jeremy ParkinsonFinance, No picture0

The decoupling is over for the US economy and its stock market according to Morgan Stanley which has long held a bearish outlook on the US, but overnight officially downgraded US stocks to “sell”, expecting the S&P to end 2019 at 2,750, while double upgrading emerging market to overweight.

In a note released by Morgan Stanley strategist Andrew Sheet, he expects a sharp slowdown for the US economy, along with a pick-up in global inflation that will keep monetary tightening intact, urging 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”.

Additionally, Sheets writes that last year’s ‘tricky handoff’ of slower growth, higher inflation and tighter policy continues, and is now joined by key shifts in the relative trend of growth and policy. These macro shifts will mean turning points in five key market
relationships, and as Morgan Stanley explains, it differs from the consensus when it comes to USD weakens, US and EU rates converge, EM outperforms, US stocks underperform, value beats growth, EM sovereigns outperform US HY.

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

Macro turning points: The world still faces slower growth, higher inflation, and tighter policy. But 2019 should see a turning point in this narrative, specifically in US growth, inflation and policy relative to the rest of the world.

Market reversals: A turning point in macro coupled with extreme pricing means we expect: 1) US and European yields to converge. 2) USD to make a cyclical peak. 3) EM assets to outperform. 4) US equities and high yield to underperform. 5) Value to outperform growth.

Where we differ: We think our calls for USD weakness, UST outperformance, US equity underperformance, value > growth, and EM vs. US credit are non-consensus, materially different from market pricing, or both.

Strategy implications: 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.