Enjoy the bull while you can. According to Morgan Stanley euro analyst Teun Draaisma, we’ve got a little more rally left, and then a long, low multi-year grind as moneys starts to get tight.
The tightening phase may start in the next quarter
or two. We believe investors need increasingly to
consider the implications of monetary and fiscal stimulus
withdrawal. We expect the first Fed rate hike in
mid-2010, but the tightening turning point could come
sooner, for instance through higher oil. Our portfolio is
already quite well positioned for this next phase, and we
provide a ‘tightening checklist’ to decide when to
position fully for it. The Fed language change ahead of
the first hike, or a market timing sell signal, would
indicate the start of that next phase, for us.
Lessons from past tightening cycles. The start of
tightening phases tends to lead to some indigestion and
a defensive rotation in equity markets, for two quarters
or more. The 1994 and 2004 episodes led to a 16% and
8% fall in MSCI Europe over eight and five months.
Sector performance was defensive, but Oil and
Materials outperformed, too. In the aftermath of secular
bear markets tightening phases have been more severe,
with equities falling on average 25% over 13 months.
Source: Morgan Stanley Research