Morgan Stanley Smith Barney is out with their latest Asset Allocation and Strategy report for clients. CIO Jeff Applegate and his team expect QE3, but they don’t expect it to be particularly effective, as it will be a reshuffling of securities rather than an expansion of the balance sheet.
MSSB forecasts that global GDP will expand 3.6 per cent this year, but 80 per cent of that growth will come from emerging markets.
Here’s the bank’s latest update to its list of equity bearish and bullish factors:
Equity Bearish Factors
- The US Federal Reserve Board, the most important central bank on the planet, is running out of tools to stimulate the world’s biggest economy.
- The ongoing deleveraging in the major developed-market economies will take several years to run its course; historically, the byproduct of this has been sluggish growth for a long time.
- Is Europe the next Japan? The continent is at risk of slipping into a “lost decade” triggered by lack of leadership and institutional inflexibility at the European Central Bank and elsewhere.
- Global growth is overwhelmingly dependent on EM policymakers, many of whom are not as seasoned as DM policymakers.
- Sovereign debt burdens are too high in several DM countries. Hard political choices need to be made or currency values are at risk.
- The benchmark 10-year US Treasury yield remains near a multi-decade low. As it rises in the years ahead, it may pose pressure on P/E multiples.
- “Event risk,” such as a terrorist attack, is ever-present.
Equity Bullish Factors
- A forward price/earnings ratio under 11 for global, US and emerging market (EM) equities is historically low. Equities are also cheap relative to bonds and cash.
- Investor sentiment is negative; sentiment is often a contrary stock market indicator.
- US housing prices have finally stopped dropping. This is good for consumer net worth, confidence, and spending.
- Incremental consumer spending in the emerging markets eclipsed US consumer spending several years ago. What’s more, EM consumer growth is in its infancy: for example, only 2% of Brazilians have a mortgage.
- Global inflation is low and likely to go lower. Price pressures are thus unlikely to pose a problem in most economies for an extended period.
- By almost any metric, the planet is now more peaceful than at any time in human history. Remember the old adage: when goods cross borders, soldiers do not.