With the US economy now re-opening and receiving back to the old typical, Morgan Stanley’s Chief U.S. Equity Strategist, Mike Wilson says he is now concerned about the dangers that come with the move. “Rather than getting excited about the reopening, we are getting a bit more concerned about execution risk and what’s already priced,” Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley mentioned in a podcast. Morgan Stanley has downgraded smaller-caps and customer discretionary stocks even though recommending a move up on the top quality curve.
Mike Wilson mentioned that the US economy could now be facing a provide difficulty and labour shortage, even though also getting cautious of demand. Although the shortage in provide shortage is restricted to specific supplies, it could nonetheless harm the recovery. “This time not only are retail sales growth, but they’re growing at rates we have never witnessed before. In fact, on a cumulative basis, retail sales are above where they would have been had we just stayed on the same uptrend pre-COVID,” he mentioned.
Stepping into the post-pandemic world, Wilson concerns if there will be a demand slowdown as people today get on with the typical lives. For firms that have been purely beneficiaries of the work from trend, Morgan Stanley’s Chief Investment Officer does see a demand reduction. He adds that there are clear candidates exactly where a reduction in demand will be seen and expects more to be added to that list.
Savings have improved for the duration of the lockdown phase of the pandemic and several argue that savings will at some point be spent. But Mike Wilson has a contradictory view. “Just because people have savings doesn’t mean they’re going to go out and buy more stuff than they already have. Bottom line, we think this is another underappreciated risk we have not previously discussed,” he added. Wilson adds that travel and leisure activity are pockets exactly where spending could boost following a year of curbs.
Currently, markets are flooded with liquidity and benchmark indices are scaling fresh highs but valuations recommend the danger is elevated. Mike Wilson additional added that the equity danger premium is incredibly considerably underpricing dangers such as peak price of modify in fundamentals as effectively as policy and liquidity, price and margin pressures, equity provide, and intense investor leverage. “Given that stocks are discounting machines, that means it’s often better to travel than arrive from an investment perspective. As a result, we think it’s time to reduce equity risk until either these risks are better reflected in earnings expectations, price, or both,” he mentioned.