Wednesday, July 28, 2021

Morgan Stanley Expects European Earnings Growth To Double That In The U.S. (plus Thaler and Chandler)

 From The, July 6:

«In Europe, earnings growth is expected to be twice as high as in the US»
Graham Secker, Head of Equity Strategy Europe at Morgan Stanley, expects more challenging markets in the coming months. He is betting on securities from the energy and financial sectors and believes Europe can outperform.

The rebound on the stock markets to the Covid 19 shock has been impressive: Equities can look back on the fifth best half-year in a hundred years. Now, however, deceleration is the order of the day. Even though the global economic outlook remains encouraging, much of the good news is now priced into stock prices, says Graham Secker, head of equity strategy for Europe at Morgan Stanley, in an interview with The Market.

Furthermore, he says, global economic momentum has peaked. Add to that rising inflationary pressures, the prospect of higher taxes in the U.S. and of the Fed curbing its securities purchases. In combination, this is likely to lead to more choppy markets in the months ahead.

While Secker expects US equities to move sideways until the end of the year, things look better on the other side of the Atlantic. The strategist is particularly confident about the UK stock market and Italian equities.

Stock markets seem unstoppable since March 2020. Is that a reason to worry or is it a sign of strength?

I think the market strength reflects that the global economic recovery is very robust. We had a big recession, followed by a big bounce back. However, because of the stimulus measures that have been put in place, the environment is very different than before the crisis and the outlook for the global economy over the next several years is very solid.

However, both the fiscal and the monetary thrust seem to be waning. Wouldn’t that potentially create headwinds for equities?

What the market is facing at the moment is what I call a first versus second derivative discussion. The first derivative is that the global economy is very strong and there is a huge amount of policy support out there, fiscally and monetarily. However, even though the global economy is very strong, growth momentum is peaking out – that’s the second derivative. The same is true with monetary policy, given that the Fed is now talking a bit more about tapering.

That makes for a tougher environment, doesn’t it?

That’s why we have tactically turned from bullish to a bit more neutral on equities. Investing is all about the changes at the margin. However, when the first derivative is very good, i.e. growth is strong and there is a huge amount of liquidity and policy support, and maybe the second derivative shift is only small, that raises the question of how bearish you want to be on asset markets. To keep things very simple: we have record economic growth and record policy support - what’s not to like?

Are the good news not in the price already?

Equity valuations are high in absolute terms but relative to fixed income markets equities are still quite cheap. When deciding on where to put your money, you know there is no return on cash and there is no real return on bonds. The hurdle to take money out of the equity market is quite high because you have to park it in an asset class where you know you won’t earn a good return. Therefore, you probably end up with a bit more money staying in equities. We’ve seen that in the record high inflows into global equities year to date.

What if interest rates head higher? At some point bonds will be an alternative to equities.

Correct. The question is at what level.

And what’s your answer?

Our work suggests that a yield in the order of 2% on the ten-year US treasury note or German bund yields moving to +15 or maybe +20 Bp could potentially derail the equity market. However, even a 2% yield on ten-year treasuries is still effectively a negative real yield. That is not a particularly attractive alternative to equities. Yields would need to go up an awful lot to create a realistic alternative where you can say: when I buy that asset, I can actually make some pretty good returns....


Also at The

July 26 Richard Thaler
«Anybody Who's Buying and Selling Stocks Thinks They're Smart»

July 28 Marc Chandler
Deja Vu All Over Again