Given the amazing run we’ve seen in equities, Morgan Stanley’s Europe team lead by Teun Draaisma now expects the market to stall out, even as continued good news comes out.
But then, a boom.
Photo: Morgan Stanley
And yet even longer term, they still see a secular bear market that’s incomplete.
Thus they’re short-term cautious, medium-term bullish, and long-term bearish.
Here’s a little more:
12-18 month outlook: equities are in a cyclical bull market (page 10 & 11).We believe this cyclical bull market for equities will only endwhen the next earnings recession is upon us. Equities will beat bonds on a 12-month view. The next earnings recession will be in 2012 at the earliest. We expect good earnings growth (our earnings growth leading indicator is suggesting 55% earnings growth for the next 12 months), while equity valuations are reasonable (2011 IBES P/E of 11.2x, 2011 IBES DY of 3.7% versus 10-year German bund yield of 3.2%).
• 3-6 month outlook: good growth will become bad market news for a while and lead to a correction in equities. We are expecting a correction in the next few months because we believe growth will be strong,leading to a reactionin the bond market and/or by policy makers that will induce a
setback in equities (like 1994, 2004). On 25 January 2010 we already moved UW equities (S&P 500 was around 1100) on this basis. Clearly we have been too early, as we were right on the good growth, but early on the start of tightening.
• Our portfolio themes:
1) weaker euro:sectors such as Staples, Energy, Pharma, Industrials benefit, stockssuch as Diageo, Roche,AstraZeneca, EADS, BAE Systems;
2) reliable growth/quality: sectors such as Staples, Pharma, stocks such as Telefonica, BAT, BASF, Total,AstraZeneca;
3) superior EM growth:sectors such as Energy, Materials, Staples, stocks such as Xstrata, Saipem, Tullow Oil, BAT.
• Multi-year outlook: secular bear market. We believe the secular bear market is incomplete for a varietyof reasons, including that banking crises and bailouts tend to precede debt crises; that the amount of debt has not been reduced yet (it only changed hands to the government); that equity
valuations never reached end of bear market levels; and our historical analysis that equities tend to struggle for longer in theaftermath of secular bear markets. When the next earnings recession hits, perhaps in 2012, we expect equities to complete the bear market that started in 2000.
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