Morgan Stanley: Easy Earnings are Over for Stocks and Bonds – Top 5 Strategies for 2022

Her Eleftherias Kourtali

Easy yields are over for stocks and bonds but there is significant value in European and Japanese stocks in 2022, as Morgan Stanley notes in the stock, bond and commodity outlook report for the new year.

The current market cycle has been “hot” and fast, he notes, so much so that investors are now facing a very different dynamic for next year. “As unprecedented support for fiscal and monetary policy recedes, the fundamentals are what will prevail,” said Morgan Stanley.

Inflation “will peak and then fall”

While inflation will be higher than many investors have seen in the past, Morgan Stanley economists believe it will soon “peak and then fall” as supply chain pressures ease and commodity prices ease. are normalized. To this end, central banks are unlikely to take drastic action by aggressively raising interest rates, risking a slowdown in growth. In any case, the tightening of monetary policy is a fact, which means that investors should be careful about US stocks and bonds.

Emerging markets seem ready to grow, but it is too early to turn its bullish stance into those markets, notes Morgan Stanley. “In China, headwinds from energy prices, the regulatory framework and COVID remain, and we believe that significant policy easing is not yet necessary, at least not yet,” he said. “The only exception is high-yield bonds in China, where we believe the market underestimates the determination and ability of policymakers to control real estate disruption.”

In this context Morgan Stanley presents the five key issues for the global investment strategy in 2022.

1. Time to cut positions in US stocks?

Contrary to many other US prospects, Morgan Stanley strategists believe the S&P 500 could fall 5% in 2022, while other developed markets could end the year higher. They recommend an underweight stance on US stocks in general to take into account the high valuations and more catch-up opportunities from other markets in the world which will close the valuation gap with the US and will be faced with less volatility.

“The persistent outperformance of US stock prices for much of the last decade is due to higher and more persistent profitability trends, but uncertainties are growing around cost pressures, supply issues, policy uncertainty and tax changes,” she said.

2. European and Japanese stocks will outperform

In contrast to US stocks, stock markets in Europe and Japan are more reasonably priced and growth-oriented. “And thanks to reduced inflationary pressures, their central banks will be extremely patient,” the US bank said, noting an overweight stance in both markets.

In Japan, equities continue to show improved returns on equity, while financial incentives, business reopening and strong global capital spending suggest that the Japanese stock market could rise 12% next year.

Meanwhile, the MSCI Europe Index has had its best 20-year performance this year compared to the rest of the world, and this pattern will continue thanks to increased mergers and acquisitions, stronger stock repurchases and changes in investor position. as many global portfolios are under-invested in the region.

“European stocks could offer double-digit rates of return in 2022,” he said, adding that the top choices were in the auto, energy and banking sectors, which would benefit from higher real bond yields.

3. The stock “picking the most” wise “strategy

Morgan Stanley analysts believe that healthcare companies and banks will move strongly upwards next year, while consumer goods will lag behind as supply and demand dynamics take on a more normal pattern.

However, compared to other points in this market cycle, there are fewer opportunities for investors. “In our view, the economic and political environment has changed permanently since the pre-COVID days, although the changes are not necessarily due to the pandemic itself,” said Morgan Stanley. The end result should mean more investment and productivity, but that could take years to do. “This creates more uncertainty and dispersion, making the selective strategy more important than ever next year.”

4. Difficult times for government bonds

Central banks in developed markets responded to the COVID-19 pandemic with almost uniform interest rate policies and a flood of liquidity. In 2022, however, bond markets will need to understand diversified policies. “Some policies, such as in the United Kingdom and Canada, will be aimed at tightening economic conditions altogether, while others will seek to further relax, albeit at a slower pace, or maintain more favorable economic conditions,” she said.

Morgan Stanley strategy analysts recommend an underweight stance on US government bonds, estimating that the 10-year yield will exceed 2% by the end of 2022.

Emerging market bonds are starting to look interesting, according to Morgan Stanley, but investors need to be patient. “With expectations that the US dollar and real returns will rise in early 2022, we believe that investors will have a better entry point later in the year,” he said, adding that he expected the US dollar to strengthen in the first half of the year. year but will lose ground in the second half.

5. Commodities: Overweight in oil

For the first time in a decade, commodities surpassed the performance of the S&P 500 in 2021, for a variety of reasons. Gold prices were supported by concerns about stagnant inflation and boosting interest rate expectations, while base metals have benefited from a combination of limited supply and growing demand.

In the new year, metals may lose their luster as high real yields drive up gold prices, while copper and zinc prices fall as supply improves. Aluminum remains a top choice for Morgan Stanley.

Overall, however, oil offers the best combination of valuations and fundamentals, with the US Bank believing it could exceed $ 90 a barrel in 2022, as growing demand offsets excess capacity.