A Ferris wheel in Munich, Germany turns at speed.
Getty ImagesInvestors face the dilemma of a “hotter, shorter” economic cycle and should reduce their exposure to risk assets such as equities and credit, Morgan Stanley strategists said.
The investment bank struck a more cautious tone in its midyear outlook, downgrading U.S. stocks and credit to neutral, as it raised the prospect of an overheating economy.
Morgan Stanley’s chief cross-asset strategist Andrew Sheets said the global economy was supported by “the largest fiscal stimulus, the largest monetary easing and the highest consumer savings rate in history.”
Read:Inflation Is Here and Rising. The Fed Might Be Behind the Curve.
“But those strong economic winds also bring complications,” he added, noting the potential for a larger rise in inflation, tighter policy from central banks, margin pressures and higher corporate taxes.
The result is a hotter, shorter cycle, Sheets said. “Hotter, because the global economy enjoys these significant tailwinds. Shorter, because these tailwinds could bring unusually fast normalization. A shorter cycle is not necessarily bad; the U.S. saw a number of them in the roaring 1920s and 1950s.”
While those problems aren’t insurmountable, the backdrop is “unquestionably complicated,” Morgan Stanley said. “Just 14 months from the lows, investors face early-cycle timing, increasingly mid-cycle conditions and late-cycle valuations,” Sheets said.
Read:Higher Corporate and Capital-Gains Taxes Won’t Hurt Stocks. Here’s What Could.
His advice to investors was to reduce their exposure to credit and stocks. “The bulk of our reduction is in credit, which our strategists are downgrading. The asset class has had an outstanding run, but is both expensive and disadvantaged in a hotter cycle,” he added.
The bank favored developed market equities, excluding the U.S., as assets to outperform “in a world running hot.” Its top region was Europe, followed by Japan, as both have less inflationary pressure, less risk of tax or central bank policy changes, and less expensive valuations.
The strategists were neutral on commodities, noting that prices were “overshooting” fair value, and reduced its underweight rating on cash. They also see yields a little higher and the U.S. dollar moving modestly higher.
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May 18, 2021 at 12:14AM
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Investors Face the Dilemma of a 'Hotter, Shorter Cycle.' Here's How to Play It. - Barron's
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